The speed and scale of future interest rate cuts from the Bank of England is in doubt after inflation rose to a higher-than-expected 3 per cent last month.

Economists had projected the rate to rise from 2.5 per cent to 2.8 per cent in the latest Office for National Statistics (ONS) figures released on Wednesday.

But the actual figure was higher, and financial traders and forecasters are now suggesting there is less certainty that there will be multiple rate cuts this year.

Before Wednesday, traders were fully pricing in two further cuts to interest rates this year, which would take the Bank of England base rate down to 4 per cent.

But many forecasters have now downgraded their predictions – some reducing the number of rate cuts they expect, others maintaining their forecasts for now, but warning they are no longer certain.

Although inflation has been forecast to rise to 3.7 per cent by the middle of this year, economists now fear it could remain stickier for longer.

This would mean millions of homeowners may pay more on their mortgages for a longer period. It would also pile pressure on Chancellor Rachel Reeves, who is banking on economic growth to help meet her fiscal rules.

Higher taxes for businesses and a rise in the minimum wage, announced in last October’s Budget, will come into force in April and are expected to contribute to stronger inflation as costs are passed on to the consumer.

Roger Barker, director of policy at the Institute of Directors, said: “The latest figures cast doubt on the pace of future interest-rate cuts, which the Bank of England may choose to delay due to the persistence of inflationary pressures.”

Sam Miley, forecasting lead at the Centre for Business and Economics Research (CEBR) said: “Today’s data alongside other recent developments – such as the Bank of England’s February Monetary Policy Report, which cut growth forecasts and suggested inflation would peak at 3.7 per cent, and the volatility in gilt markets in January – have contributed to a change in our outlook for interest rates this year.

“At the start of the year, we were projecting three interest rate cuts in 2025, including the one implemented earlier this month. We have now revised this down to two cuts.”

Ruth Gregory, deputy UK chief economist at Capital Economics said: “The upside surprise in January shouldn’t have too much of an effect on the Monetary Policy Committee’s view on where interest rates need to be.”

But she added: “With consumers particularly sensitive to higher food price inflation, since they see these prices every week, the risk is that the rise in inflation this year proves more persistent and rates are cut more slowly than we expect, or not as far.”

What is stagflation?

The Bank of England cut its base rate from 4.75 per cent to 4.5 per cent earlier this month, partly to help boost the struggling economy which some analysts fear is at the risk of stagflation – weak growth and high inflation.

The Government has put growing the economy at the heart of its policymaking, but growth has been flatlining, and was just 0.1 per cent in the last quarter of 2024, according to figures published last week.

Low growth will hamper the Chancellor’s efforts to stick to her fiscal rules, whereby day-to-day spending is met by taxation rather than borrowing. With her financial headroom of £9.9bn thought to have been wiped out, Reeves faces having to make cuts to public services in her fiscal statement on 26 March, or raising taxes.

She met investment bankers on Wednesday to discuss how to kickstart growth. The Office for Budget Responsibility was also expected to deliver an update of its forecasts which will inform the Chancellor’s 26 March statement.

Several economists pointed to softer services inflation as a reason for not cutting their overall forecasts, suggesting that although it rose from 4.4 to 5 per cent, this was still below predictions.

Thomas Pugh, economist at audit, tax and consulting firm RSM UK, said: “We still expect one cut a quarter this year, but evidence that the labour market is holding up and inflation is rising faster than expected means the risks of just two cuts are growing.

“Despite headline inflation coming in hotter-than-expected, the number that matters more for the MPC is services inflation, which was actually a little softer than the latest MPC forecast (5 per cent vs 5.2 per cent).

“That suggests domestic price pressures aren’t as strong as implied by the jump in the headline rate and keeps the idea of rate cut in May firmly on the table.”

Deutsche Bank Research is still forecasting four more cuts to interest rates this year, but its chief UK economist Sanjay Raja said: “We think the chances of a temporary pause [in cuts] through the second quarter of the year remains elevated – especially given the upside risks still prevalent in the economy over the next few months.”

What will fewer interest rate cuts mean for mortgages?

Fewer interest rate cuts this year would be bad news for millions of mortgage holders. Slower cuts would mean larger costs for those on variable mortgages, that drop when interest rates do.

Those on fixed mortgages that are coming up for renewal in the next year could also face higher prices. If markets start to expect fewer interest rate cuts, this can be reflected in swap rates, which can have an impact on the cost of fixed mortgages.

Some fixed mortgage deals had started to drop below 4 per cent in recent weeks, but experts believe these may well be pulled in the coming weeks.

Lewis Shaw, a broker at Shaw Financial Services, said: “Today’s inflation figures make for dire reading, and the UK bond market’s reaction will be the key driver of how long the new sub-4 per cent mortgage deals are around.

“I suspect they’ll vanish in short order, which will come as a blow to the thousands of mortgage holders due to renew this year who are holding out hope for more favourable rates.”

The Chancellor said: “Getting more money in people’s pockets is my number one mission. Since the election we’ve seen year-on-year wages after inflation growing at their fastest rate in three years – worth an extra £1,000 a year on average – but I know that millions of families are still struggling to make ends meet.

“That’s why we’re going further and faster to deliver economic growth. By taking on the blockers to get Britain building again, investing to rebuild our roads, rail and energy infrastructure and ripping up unnecessary regulation, we will kickstart growth, secure well-paid jobs and get more pounds in pockets.”