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(Bloomberg) -- An unexpected surge in UK inflation has dashed any hope that the Bank of England is done with hiking interest rates.

Before today, traders were casting doubt on whether the BOE would even raise rates this week. But then came a shocker of an inflation report showing consumer prices advanced 10.4% in February, surpassing all estimates in a Bloomberg survey and bucking economists’ expectation of a slowdown.

It’s a telling sign that UK inflation is still out of control and will add pressure on the central bank to keep raising rates despite tighter global financial conditions imposed by the collapse of three US banks and the takeover of beleaguered lender Credit Suisse Group AG.

Traders reacted by selling bonds, sending the yield on two-year gilts up as much as 26 basis points, headed for the biggest spike since September. The pound jumped to $1.23, the highest in over a month, and money markets fully priced in a quarter-point hike Thursday.

“This is an ugly report, and especially disappointing after the false hope given by the drop in core inflation in the January report,” said Antoine Bouvet, a strategist at ING Groep NV. “This cements the call for another 25-basis-point hike.” 

UK food and non-alcoholic drink prices soared 18%, the fastest pace in 45 years, and increases in clothing costs accelerated. Core prices — which exclude volatile food and energy — also picked up last month to 6.2% after decelerating to 5.8% in January. Services inflation jumped to 6.6% from 6%, a sign of increasing domestic wage pressures that is closely watched by the BOE.

The report will likely intensify the debate at the BOE, where divides have emerged on the Monetary Policy Committee over how much further to raise rates given the headwinds to growth. Officials raised the benchmark rate to 4% in February, extending a tightening cycle that has lifted borrowing costs from 0.1% in late 2021. Money-market pricing implies around 65 basis points of further hikes, up from around 40 basis points at Tuesday’s close. 

The Federal Reserve’s decision later Wednesday will also set the tone for the BOE and its policy further out. While most economists expect a quarter-point interest-rate hike, some say US policymakers should pause to shore up financial stability.

“It seems unlikely that the BOE is all of a sudden going to turn hawkish on a single data print,” said Nick Rees, FX analyst at Monex Europe. Instead, officials will have to find a balance between sounding “marginally hawkish” while incorporating financial stability concerns into their forward guidance, he said.

The BOE’s chief hawk Catherine Mann has warned that the UK risks facing the “worst of both worlds” in high inflation and low growth. On the dovish end of the nine-strong rate-setting committee, Silvana Tenreyro and Swati Dhingra have made the case for halting hikes, cautioning against overtightening. 

Governor Andrew Bailey has stayed more neutral, saying that he has not decided whether more rate rises will be needed.

“The BOE is dealing with inflation that is seeing no signs of abating, a labor market that is very tight and a strained global financial system,” said Pooja Kumra, senior European rates strategist at Toronto-Dominion Bank. “It’s a very tricky situation.”

--With assistance from James Hirai.

(Updates prices throughout.)