UK inflation jumps to 3.5%: What this means for interest rates, mortgages and savings

“This inflation surge highlights the brutal hit to household and business finances from April’s multitude of eyewatering bill rises and tax hikes”

The latest headline inflation number does not make for comfortable reading. Borrowers, businesses, central bank policymakers and Number 11 will have their collective heads in their hands on the news that prices rose at their fastest pace for more than a year last month.

So-called “awful April” saw a raft of bill hikes, including for gas and electricity, water, council tax and broadband usage, feed through into the year-on-year comparisons. As a result, the annual consumer prices index (CPI) measure of inflation hit 3.5 per cent last month, up from 2.6 per cent in March and the highest since January 2024. That was slightly ahead of the 3.2 per cent to 3.3 per cent outcome that most economists had been expecting.

It comes as the Bank of England (BoE) attempts to put a lid on inflation, which peaked at 11.1 per cent in October 2022, while balancing that against recessionary risks from global uncertainties and an ongoing trade war. Policymakers have pushed through a series of modest interest rate cuts in recent months as inflation nudged back down towards the central bank’s 2 per cent long-term target.

Millions of us saw our bills stack up last month.

While April’s inflation shock could prove to be a blip, further fiscal easing over the summer is not a given, dealing a blow to hundreds of thousands of mortgage holders whose fixed-term deals will be coming to an end.

Sarah Coles, head of personal finance at investment firm Hargreaves Lansdown, said inflation was “back with a bang” with April’s spike in prices the biggest witnessed since the cost-of-living crisis.

“Unfortunately, there’s every sign this unwanted guest could end up sticking around for months,” she noted. “While price rises look alarming, it won’t necessarily be setting off the alarm bells for the Bank of England. It has been predicting a spike for some time.

“It also expects inflation to remain relatively high for a period. Much of this has already been factored into its calculations when it decided to cut rates last month. It means these figures alone are unlikely to spark a dramatic rethink by the Bank.”

The spike in inflation comes after Ofgem's energy price cap rose by 6.4% in April, having fallen a year earlier.

On mortgages, Coles added: “There’s enough uncertainty around at the moment for it to be tricky to guarantee the future path of mortgages. If you have a re-mortgage coming up, it’s well worth securing a rate now, and then looking again when your deal is up. If rates have fallen again, you can shop around for something better, and if the market has been caught by surprise, you’ll have locked in a decent deal.”

Experts have said inflation may also have been pushed higher last month as many firms responded to the UK government’s move to raise employers’ national insurance contributions and the minimum wage by increasing their prices.

Accountancy body the ICAEW said April’s inflation surge now cast doubt on a summer rate cut.

Suren Thiru, the organisation’s economics director, said: “This inflation surge highlights the brutal hit to household and business finances from April’s multitude of eyewatering bill rises and tax hikes, with higher energy costs in particular driving an uncomfortably large increase in the headline rate.

Storm clouds have been gathering over the Bank of England for some time now.

“These figures probably rule out a June rate cut and while policymakers should view April’s spike as a temporary blip, the size of the increase means an August policy loosening is far from a done deal.”

Earlier this month, the Bank of England cut the official base rate to 4.25 per cent from 4.5 per cent in a widely anticipated move and despite hopes among some for a larger half-point cut. Analysts have been predicting that the central bank will cut rates at least two more times this year. Five further meetings of the rate-setting monetary policy committee (MPC) are scheduled before the end of 2025 - in June, August, September, November and December.

Luke Bartholomew, deputy chief economist at Scottish funds heavyweight Aberdeen, said a particularly strong services inflation figure for April suggested that firms were starting to pass through their higher costs to consumers.

“This will reinforce the concerns voiced by BoE chief economist Huw Pill that underlying inflation pressures are sticky and so there is less room for the Bank to cut rates,” he noted. “Nonetheless, we think a quarterly profile of rate cuts remains appropriate, but the chance of the easing cycle speeding up any time soon has fallen.”

Over at Glasgow-based financial mutual Scottish Friendly, savings expert Kevin Brown reckons the MPC will hold rates in June, before delivering two more quarter-point cuts by the end of the year, making four in total for 2025.

“That will offer some much-needed relief - but first, households may have to grit their teeth through another few months of rising costs,” he added.

Savings

Higher inflation also risks knocking a chunk out of the spending power of those with decent levels of savings - and indeed there are more savers than borrowers in the UK these days.

Mark Hicks, head of active savings at Hargreaves Lansdown, said: “With the average easy access rate now offering 2.75 per cent - and branch-based accounts with the high street giants offering significantly less, there’s a real risk your savings will be gradually eroded by inflation.

“However, you can currently get more than 4.5 per cent in easy access accounts - and almost 4.5 per cent if you fix for a year or longer - so now is the time to shop around with online banks and savings platforms to get the best possible deals.

“It’s impressive how organisations are still competing for business, but we have seen savings rates start to ease off a little, so there are no guarantees of how long these great rates will be around.”

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