UK Inflation Tops Forecasts, Casting Doubt on BoE Rate Cut Timeline; GBP/USD Spikes

UK Inflation Data Clouds BoE Rate Cut Hopes

Hotter-than-expected UK inflation data and solid GDP growth reignited debate over the BoE’s rate path on Wednesday, May 21.

The UK’s annual inflation rate (headline) accelerated from 2.6% in March to 3.5% in April, above a consensus of 3.3%.

Key Data from the Office for National Statistics included:

• The Consumer Prices Index, including owner-occupier housing costs (CPIH), rose 4.1% in the 12 months to April after rising 3.4% in March.
• The largest upward contributions came from housing and household services, recreation and culture, and transport, offsetting a downward contribution from clothing and footwear.
• The Core CPIH (excluding energy, food, alcohol, and tobacco) increased by 4.5% in the 12 months to April, compared with 4.2% in March.
• Core CPI (excluding energy, food, alcohol, and tobacco) rose from 3.4% in the 12 months to March to 3.8% in the 12 months to April.
• The CPI services annual rate rose 5.4% in April, up from 4.7% in March.

BoE Caught Between Strong GDP and Sticky Inflation

The inflation data followed better-than-expected GDP growth, which may delay further BoE rate cuts. Notably, the UK economy expanded 0.7% quarter-on-quarter in Q1 2025 (Q4 2024: +0.1%), with services sector output rising 0.7%, up from just 0.1% in Q4 2024.

Bank of England Chief Economist Huw Pill, speaking on Tuesday, May 20, expressed concern regarding the pace of policy easing:

“In my view, that withdrawal of policy restriction has been running a little too fast of late, given the progress achieved thus far with returning inflation to target on a lasting basis.”

Following the inflation data, Pill’s concerns appeared justified:

“I do worry about the fact that inflation has stayed stubbornly high, and pay dynamics have stayed stubbornly strong.”

Still, some economists have raised doubts about the sustainability of recent GDP growth. Simon Pittaway, Senior Economist at Resolution Foundation, noted:

“The latest data for April hasn’t been encouraging. The UK composite PMI dropped to its lowest level since September 2023, consumer confidence fell and business uncertainty spiked – reflecting the employer NICs rise and changes in US tariff policy.”

Friday’s upcoming retail sales figures could give a better gauge of momentum in the UK economy and the BoE’s path forward.

GBP/USD Volatility Post-Inflation Data

Ahead of the inflation report, the GBP/USD fell to a low of $1.33760 before rebounding to a high of $1.34373. Following the report, the pair surged to high of $1.34508 before briefly falling to a low of $1.34219.

On Wednesday, May 21, the GBP/USD was up 0.40% to $1.34461. The upswing likely reflected markets scaling back immediate BoE rate cut bets.

Looking Ahead

Traders now turn to Friday’s UK retail sales for further clues on consumer sentiment and the broader economic outlook. A pullback in retail sales could signal a deteriorating economy and softer inflation, potentially reviving bets on further rate cuts. However, strong retail sales may further temper BoE rate cut expectations, sending GBP/USD higher. In parallel, trade developments will remain a key driver of risk sentiment and GBP/USD price action.

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