06:52 AM EDT, 06/18/2025 (MT Newswires) -- Higher than expected United Kingdom inflation of 3.4% year over year in April, while the Bloomberg consensus was 3.3% indicates that there is sufficient demand in the economy for companies to pass on the steep rise in their costs due to the April hikes in tax and minimum wage onto customers, said Berenberg.

,With cost-push inflation likely to keep CPI inflation around 3.5% for the rest of the year, the bank doesn't expect another interest rate cut in 2025.

Instead, Berenberg predicts the Bank of England to hold off until 2026, when slower government spending growth and declining inflation will allow it to lower the bank rate twice more to 3.75%.

There was some slightly better news in services inflation, which fell back from 5.4% year over year in April to 4.7% in May, but 0.25ppts of that decline was due to the ONS correcting a mistake that caused it to overestimate the cost of road tax in April, pointed out the bank. Another 0.1ppt was due to a fall in volatile airfare prices.

The big picture remains that U.K. services inflation is proving more stubborn than that in other major economies due to policy-induced increases in labor costs.

Slower inflation in services prices was offset by faster increases in food prices, up from 4.0% year over year to 4.7%, and core goods, where price growth increased from 1.1% year over year to 1.6%. Stronger food price inflation than forecasters -- including the BoE -- anticipated suggests that grocers have enough pricing power to pass increased staff costs and agricultural prices on to customers, added Berenberg.

Looking ahead, with rising labor costs likely to sustain services inflation of around 5% year over year -- above the 3% year over year pace consistent with target CPI inflation in the past -- inflation is unlikely to ease this year. The bank expects CPI inflation to hover around 3.5% year over year and the risks are skewed to the upside.

Were conflict in the Middle East to push the oil price up to $85 per barrel, a rise in CPI inflation to 4% year over year would become likely. With the BoE worried about high household inflation expectations, Berenberg suspects that would further reduce the chances of another interest rate cut this year.