UK firms plan smaller price rises than in April, BoE survey shows

By Suban Abdulla

LONDON, June 5 (Reuters) - British businesses expect to increase prices less quickly in the year ahead than they did in April as some of the initial energy price shock caused by the Iran war fades, according to a survey published by the Bank of England on Friday.

The BoE's Decision Maker Panel showed companies in May expected price growth of 4.0% in the coming 12 months, down from a more than two-year high of 4.4% in April though still above the 3.4% expected in February before the conflict started.

On a three-month moving-average basis, price expectations rose by 0.2 percentage points to 4.0%, the highest since February 2025.

The survey of more than 2,000 British companies showed 57% of firms expected to increase their prices in response to the energy price shock, down 7 percentage points from April, while an unchanged 68% expect lower profit margins.

Energy prices have risen sharply since the start of the U.S.-Israeli war on Iran in late February, and the BoE is keen to gauge how much of that increase will be passed on to consumers before it raises interest rates.

Other surveys have also shown a broad swathe of companies are planning price rises.

Financial markets expect the central bank to keep borrowing costs at 3.75% this month but see one or possibly two quarter-point hikes in interest rates later this year.

The DMP survey is likely to reinforce the BoE's view that the labour market is softening, limiting businesses' ability to find customers for more expensive goods and services.

Businesses in May said they planned to reduce employment levels by 0.4% over the next 12 months - the biggest planned reduction in six months - while expected year-ahead wage growth held at 3.4% in the three months to May, its joint-lowest since regular polling began in July 2022.

"Rate setters can probably take some comfort that second-round effects through firms' inflation expectations seem muted for now, and they need to contend with weaker job growth," Rob Wood, chief UK economist at Pantheon Macroeconomics, said.

(Reporting by Suban Abdulla; editing by David Milliken)