UK Inflation Unexpectedly Rises, Lifting Pound

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The UK's inflation rate rose to 3.5% in April 2025, exceeding analysts' expectations of 3.3%, according to data released by the Office for National Statistics (ONS) on Wednesday. This figure is a sharp increase from 2.8% in February and 2.6% in March.

The core inflation rate, which excludes volatile goods such as energy and food, climbed to 3.8% from 3.4% last month.

The surge in inflation was caused by rising costs of housing and household services, transportation, and recreational activities. Electricity, gas and fuel prices rose 6.7% year-on-year, while water and sewage charges rose 26.1% month-on-month, the largest increase since February 1988.

The pound rose modestly after the UK's inflation rate rose unexpectedly in April. Quek Ser Leang and Peter Chia, foreign exchange analysts at Hua Bank Group, believe that GBP/USD will rise slightly and test 1.3420. But given the current momentum, the main resistance level of 1.3445 may be difficult to reach.

An unexpected surge in inflation in April has made monetary policy decisions more difficult for the Bank of England (BoE). Earlier this month, the BoE cut interest rates to 4.25%. Previously, some members of the BoE's Monetary Policy Committee (MPC) had expressed opposition to further rate cuts. Now, higher-than-expected inflation has called into question the likelihood of further BoE rate cuts.

Analysts are divided on the BoE's next move.

Patrick O'Donnell of Omnis Investments said that continued inflationary pressures reduce the likelihood of an August rate cut, while market expectations have adjusted the rate cut from 36 basis points to 35 basis points by the end of 2025.

Data from the London Stock Exchange showed that the probability of an August rate cut was only 43%, and the market currently expects only a 34 basis point rate cut in 2025, down from 41 basis points before the data was released.

However, Francesco Pesole of ING pointed out that the improvement in the trend of service industry inflation may still provide support for an August rate cut, and he believes that the surge in inflation is partly due to one-off factors.

The Bank of England is currently facing a dilemma, needing to strike a balance between continued inflation and a fragile economic recovery, and there is still great uncertainty about its next move.




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