The Pound reached a three-year high on Wednesday, buoyed briefly by data showing that UK consumer inflation rose more sharply than anticipated in April, limiting the Bank of England’s flexibility to swiftly cut interest rates to support economic growth.
According to the Office for National Statistics (ONS), consumer prices climbed 3.5% in April, up from 2.6% in March, the highest rate since January last year and the biggest monthly jump since 2022, when inflation was surging, Reuters reports.
Sterling climbed as much as 0.58% to $1.347, its highest level since February 2022, while remaining relatively stable against the Euro, trading at 84.325 pence.
UK Finance Minister Rachel Reeves expressed disappointment with the inflation figures, stating: “I know cost of living pressures are still weighing down on working people.”
A Reuters poll of economists had forecast April inflation at 3.3%, while the Bank of England had projected a slightly higher rate of 3.4% earlier this month.
The stronger-than-expected inflation was partly anticipated due to hikes in water, gas, and electricity bills. According to the ONS, a rise in airfares also contributed to the higher inflation reading.
A key concern for the Bank of England is that services inflation, which reflects domestic price pressures, rose to 5.4% in April, exceeding even the highest estimate in a Reuters poll (4.8%) and surpassing the BoE’s own forecast of 5%.
This hotter-than-expected data is likely to deepen concerns among members of the Monetary Policy Committee (MPC) about the economic outlook. While Britain’s economy showed strong growth in early 2025, a slowdown is anticipated in the second half of the year.
That said, analysts noted that many of the price increases in April were likely one-off events, suggesting that inflationary pressures should ease over time, despite the impact of US tariffs currently in place.
“Big picture, this is not the end of a quarterly cutting cycle – not yet at least,” stated Deutsche Bank chief UK economist Sanjay Raya.
“While the bar may be higher for an August rate cut than previously thought, it's likely that the majority of the MPC will look past this if inflation expectations start to recede… the labour market continues to loosen as we expect, and pay settlements continue to come in lower.”
UK interest rate futures indicate that traders are now expecting only 35 basis points of rate cuts from the Bank of England between now and the end of the year.