Traders Scale Back Rate Cut Expectations as UK Inflation Surges
Traders are now betting that the Bank of England will make only one further interest rate cut this year, following a sharper-than-expected rise in inflation to its highest level since early 2024.
The unexpected jump in prices has led markets to scale back expectations, with the likelihood of a quarter-point cut in August dropping to 50%, down from 60% before the data release. The pound responded by gaining 0.6%, hitting its strongest level since February 2022.
Sanjay Raja, chief UK economist at Deutsche Bank, commented: “This will almost certainly be the death knell for a June rate cut. While August still seems likely in our view, it certainly has become a lot more interesting and balanced.”
The shift in sentiment comes after the Bank of England’s chief economist, Huw Pill, warned on Tuesday that interest rates may have been lowered too quickly. Pill, who sits on the Monetary Policy Committee (MPC), voted against the recent cut from 4.5% to 4.25%.
Luke Bartholomew, deputy chief economist at Aberdeen, added: “We think a quarterly profile of rate cuts remains appropriate, but the chance of the easing cycle speeding up any time soon has fallen.”
Costas Milos, professor of finance at the University of Liverpool, said April’s inflation rise to 3.5% matched the Bank’s expected peak for Q3 2025—highlighting the severity of the latest reading.
“The concern is that this surge could generate inflationary momentum, further fuelled by Donald Trump’s tariff policies,” he warned. “We could see inflation rising to 4%, well above the Bank’s forecast.”
He added that most MPC members are likely to vote to hold rates at 4.25% in June, though a minority might even favour a return to 4.5% if inflationary pressures persist.
