Interbank lending rates for three-month sterling posted their biggest one-day gain since mid-March yesterday, rising to their highest level since the end of April, as wholesale money markets digested the likelihood the Bank of England would not cut benchmark borrowing costs again soon.

The Bank, in its latest quarterly inflation report on Wednesday, forecast annual UK consumer prices index inflation would rise towards 4% later this year. The Bank's Monetary Policy Committee is charged with targeting inflation of 2%.

Based on market expectations in the 15 working days to May 7 - that the MPC would cut UK base rates further from their current level of 5% to 4.5% - the report put inflation at about 2.25% on the Bank's chosen two-year time horizon and warned the risks were to the upside.

The British Bankers' Association's London Interbank Offered Rate (Libor) for three-month sterling jumped from 5.7975% on Wednesday to 5.84% yesterday. The six-month and one-year rates showed even greater rises, increasing respectively by 0.06625 percentage points to 5.89625% and by 0.10687 percentage points to 5.9725%.

Richard McGuire, fixed-income strategist at Royal Bank of Canada Capital Markets, said of UK base rates: "We (markets) went from pricing in the possibility of some modest degree of easing to fully pricing that out, and even perhaps flirting with the idea of rates rising from here, so it's that which has put sterling Libor under pressure."

As well as projecting a further leap in UK inflation, from the unexpectedly high figure of 3.0% for April published on Tuesday, the Bank of England is forecasting the year-on-year growth rate in the UK will fall to 1% around the end of this year.

It projected the current three months to June 30 would see slower UK growth than the 0.4% expansion in the first quarter.

Official growth figures yesterday for the 15-nation eurozone showed this bloc had much stronger momentum than the UK in the first quarter.

The eurozone grew by 0.7% between the final quarter of last year and the first three months of 2008 - beating the consensus forecast of 0.5%.

Germany grew by 1.5% during the quarter and France expanded by 0.6%.

Although eurozone inflation dipped from 3.6% to 3.3% in April, this was not viewed as likely to send the European Central Bank rushing to cut interest rates in the 15-nation bloc.

The strong eurozone growth numbers, and deteriorating UK economic pictur, pushed the euro to a session high of 79.88p yesterday. London-based consultancy Capital Economics, which is among the most downbeat forecasters on UK growth and has been particularly dovish on the interest-rate outlook, yesterday scaled back its expectations of further cuts.

However, it remains dovish on rates even with the rise in its year-end forecast for UK base rates from 4% to 4.5%.

And Capital Economics warned of an increasing risk of recession amid the hardening interest-rate outlook.

Jonathan Loynes, its chief European economist, said: "The recent dreadful news on inflation and the Bank of England's hawkish Inflation Report suggest that interest rates will not fall as quickly this year as we had previously hoped. But the result is a greater risk of recession next year and beyond."

Citing the reaction to the inflation report, Loynes said: "Some headlines even suggested that rates would be on hold until 2010."

He claimed: "This all seems a little bit over the top. After all, the inflation report itself predicted that, if rates were to remain at 5%, inflation would be a touch below its target and falling at the two-year policy horizon. In other words, even the MPC still seems to believe that rates need to come down a bit further."

The MPC has cut UK base rates by a quarter-point three times this cycle, in December, February, and April.