British factory gate inflation rose in January to its highest rate in more than 16 years, undermining hopes that the Bank of England will be ready to cut interest rates as fast as financial markets had been expecting.

Producer price inflation surged 1 per cent on the month in January, taking the annual rate up to 5.7 per cent from 5.0 per cent in December, figures from the Office of National Statistics revealed today.

Analysts had expected an annual reading of 5.1 per cent.

The Bank of England cut interest rates by a quarter-point last week to 5.25 per cent, the second quarter-point cut since December.

Halifax, the country's largest mortgage lender, has pencilled in at least another quarter-point cut in interest rates this year.

Martin Ellis, its chief economist, said that further rate cuts depended, however, on whether the Bank believed that it could keep inflation under control.

"We had been expecting a further increase in output price inflation, but these figures are unequivocally awful," Philip Shaw, an Investec economist, said.

Ahead of last week's rate cut Mervyn King, the Governor of the Bank of England, sounded a warning that inflation is likely to rise more than one percentage point above the Bank’s 2.0 per cent target over the course of the year, meaning that he would have to write a letter of explanation to the Chancellor of the Exchequer.

The Bank of England's Monetary Policy Committee faces a difficult juggling act of ensuring that inflation is kept under control while ensuring that rates are kept sufficiently low to stimulate a stalled housing market and flagging economy.

While producer output prices were substantially pushed up by higher petroleum and food prices, the core rate still spiked up to 3.2 per cent from 2.7 per cent in December and 2.4 per cent in November, the fastest monthly rate since records began in 1986.

Input price inflation — the cost of materials to producers — surged to 18.9 per cent on the year in January, likewise the strongest rate since the series began 22 years ago.

Crude oil prices rose 70.3 per cent on the year in January, the highest rate in nearly eight years, while domestic food prices soared 36 per cent on the year, a record high.

Separate figures out today from Connells, the country's second-largest estate agency network, revealed that mortgage approvals last month were the weakest January since Bank of England records began in 1994.

Mortgage volumes rose 3 per cent to 75,300 from December's record low, Connells calcualates, but further rate cuts are needed to restore confidence across the entire market.

Official figures out today from the Department for Communities and Local Government reported that annual house price inflation retreated to a 12-month low of 9.1 per cent in December, from 9.7 per cent in November and a 28-month high of 12.3 per cent in July.

Analysts at Global Insight predict house prices to fall 5 per cent on average this year and next.

Halifax and Nationwide, the country's largest building society, predict that house prices will be flat on average during 2008.