UK Inflation Surprise Raises Questions Over BoE Rate Cut Path

British inflation accelerated sharply in April, exceeding both market and central bank forecasts, reigniting concerns that price pressures remain deeply rooted in the economy and potentially challenging the Bank of England’s expected path of gradual interest rate reductions.

Data released by the Office for National Statistics (ONS) on Wednesday showed that the Consumer Price Index (CPI) rose by 3.5% year-on-year in April, up from 2.6% in March. This marks the highest reading since January 2024 and the steepest monthly rise in annual inflation since the 2022 price surge. The figures outpaced the BoE’s own projection of 3.4% and a Reuters consensus estimate of 3.3%.

The headline inflation shock comes at a critical time for the Bank of England, which lowered interest rates by 25 basis points earlier this month to 4.25% in a divided vote. The unexpectedly high inflation print is likely to harden the case for a slower pace of easing in the months ahead, with many analysts now seeing less than two rate cuts by year-end.

Services Inflation Signals Domestic Price Pressure

One of the most concerning aspects of the April data was the surge in services inflation — a key indicator of domestic pricing momentum and a closely watched metric by the BoE. Services prices rose by 5.4% on an annual basis, far above the BoE’s 5.0% forecast and well above the Reuters consensus of 4.8%.

The ONS noted that seasonal factors such as the timing of Easter contributed to the price surge, particularly in the travel sector. Air fares jumped by 27.5% from March, marking the second-largest monthly rise on record. In addition, April saw scheduled increases in regulated utility bills and employer tax contributions, further fuelling inflationary pressures.

BoE’s Forward Guidance Under Scrutiny

Earlier this month, the BoE had forecast inflation would peak at 3.5% in 2025 before returning gradually to its 2% target. However, the scale of April’s upside surprise and the persistence of services inflation have cast doubt on the bank’s confidence in a smooth disinflation path.

BoE Chief Economist Huw Pill, who voted to keep rates on hold at the last policy meeting, warned on Tuesday that the recent pace of rate cuts may have been too aggressive given ongoing wage pressures. Still, he described his stance as a “skip” rather than a complete halt to the easing cycle.

The May 8 decision revealed a split Monetary Policy Committee (MPC): two members pushed for a larger cut, while Pill and one other opted for no change, underlining the uncertainty within the central bank itself.

Market Implications and Policy Outlook

Wednesday’s inflation data is likely to complicate the BoE’s decision-making in the coming months. Markets, which had previously priced in two more rate cuts by year-end, are now scaling back expectations. Investors are also grappling with the possibility that lingering domestic price pressures — particularly in services — could push policymakers to pause again before resuming the easing cycle.

With inflation now tracking above target and forward-looking indicators pointing to sticky price dynamics, the BoE will likely need further evidence of sustained disinflation before accelerating rate reductions.

The next BoE policy meeting is scheduled for July, and the incoming data on wage growth, consumer activity, and services inflation will be key in shaping the central bank’s tone. For now, the April inflation print serves as a clear signal that the fight against inflation in the UK is far from over.