Any lingering hopes of a further near-term cut in UK interest rates were dealt a potentially fatal blow yesterday when it emerged that the UK public's median expectation of benchmark inflation over the next 12 months had leapt to a fresh record high of 4.1%.

Any lingering hopes of a further near-term cut in UK interest rates were dealt a potentially fatal blow yesterday when it emerged that the UK public's median expectation of benchmark inflation over the next 12 months had leapt to a fresh record high of 4.1%.

The number of people expecting annual UK consumer prices index inflation to rise to more than 6% exceeds that predicting it will be below the 2% target.

Members of the Bank of England's Monetary Policy Committee have expressed particular worries over the threat which rising inflation expectations pose to economic stability.

Fears among MPC members that a dangerous price-wage spiral could develop, as the cost of energy, food and imports surges, will be fuelled even further by the latest leap in inflation expectations.

The latest monthly survey from pollster YouGov and banking giant Citigroup showed yesterday that the UK public's median expectation of inflation over the next 12 months had jumped from 3.8% in April to 4.1% this month.

This is the highest since the survey began in 2005.

The MPC has cut UK base rates by a quarter-point three times so far this cycle, in December, February, and April, to take them to 5%, as UK economic growth has slowed sharply amid the fall-out from massive default on US sub-prime mortgages.

There had only a month ago been high hopes of a further rate cut by June. But these were shattered by news on May 13 of an unexpected leap in benchmark annual UK consumer prices index inflation from 2.5% in March to 3.0% in April, and the Bank of England's forecast on May 14 that it could rise towards 4% later this year.

Economists expect CPI inflation to have risen above 3.0% this month - taking it more than one percentage point above the 2% target set for the MPC by the Treasury and necessitating an explanatory letter from Bank of England Governor Mervyn King to Chancellor Alistair Darling.

Sterling was last night trading higher against both the euro and US dollar in the wake of the inflation expectations survey, as UK interest-rate forecasts hardened.

The euro, which was depressed by a survey from news agency Reuters showing most economists still expect a cut in benchmark interest rates in the 15-nation eurozone from 4% by the year-end, was last night trading down about three-quarters of a penny on its close in London on Tuesday at around 78.90p.

Sterling was up more than half-a-cent against the US currency, trading slightly above $1.98.

Howard Archer, chief UK economist at consultancy Global Insight, said: "The May Citigroup/YouGov inflation expectations survey pours more cold water on already markedly reduced hopes of another cut in interest rates any time soon.

"The survey shows that inflation is expected to reach 4.1% over the next 12 months. This is the highest level since the series started in 2005, and up from the 3.8% expected in April, 3.6% in March and 3.1% in February.

"It is also more than double the Bank of England's target inflation rate of 2.0%. Furthermore, the survey revealed that more people expected inflation to be 6% or above than below 2% during the year ahead."

Archer noted that the Citigroup/ YouGov survey was watched closely by the Bank of England and declared it would be "a source of serious concern to the MPC".

He added: "The MPC is particularly worried that an extended period of markedly above-target consumer price inflation - primarily resulting from higher utility and food prices as well as a markedly weaker pound - could lead to a long-lasting rise in inflation expectations.

"Sustained, heightened inflation expectations would be liable to adversely affect the behaviour of price and wage-setters, thereby increasing the risk of a very damaging price-wage spiral developing.

"Latest evidence on pay is broadly reassuring and suggests that pay moderation is currently continuing. However, companies are currently very keen to raise their prices to support their margins."

Archer continues to expect a significant fall in UK base rates from here but sees the next move slipping ever-further into the future, having previously viewed May and June as possible months for a reduction.

He said yesterday: "The further rise in inflation expectations in May reinforces (the) belief that the Bank of England is unlikely to trim interest rates again until August at the very earliest despite markedly weakening economic activity, a moribund housing market and a deteriorating outlook.

"Even August may well prove too early for another interest-rate cut, as the Bank of England is unlikely to act until it has sustained, clear evidence that wage moderation is continuing and reduced demand is undermining companies' pricing power.

"While we still believe that extended below-trend growth is likely to lead to interest rates eventually falling as low as 4.0%, it will be a gradual process and unlikely to happen until well into 2009."

On a five to 10-year view, the UK public's median expectation is for inflation of 3.9%, up from 3.7% in last month's survey.