Inflation uptick in services 'particularly worrisome' for BoE

UK inflation leapt to its highest level since January 2024 last month, with consumers dealt a hammer blow by the jump in household energy and water bills, which came into effect in April.

Yet, even excluding the expected surge in energy prices, underlying inflation also ballooned to a one-year high in April, which is not at all encouraging.

This, we believe, can at least partly be attributed to the upside pressure on consumer prices triggered by the government’s business tax raid that also kicked in at the beginning of last month.
Today’s data should put pay to the possibility of another UK rate cut for a few months, and will likely encourage the Bank of England to maintain its hawkish policy guidance for some time yet.

The fresh bounce in services inflation, which is now running well above estimates, will be particularly worrisome for the MPC, and policymakers will need to see far more progress here to be confident in achieving the 2% target anytime soon. Indeed, swap markets are now not fully pricing in the next 25bp cut until as far out as the bank’s November meeting.

Sterling has received a leg up following the news, advancing to its strongest position on the dollar in more than three years this morning. With the Bank of England set to maintain its “gradual” approach to cuts, and Labour continuing to actively pursue closer ties with the European Union, we think that the pound is well placed to be one of the better performing major currencies in the world in 2025.