LONDON (Reuters) - British manufacturers hiked prices in March at the fastest rate since 1991, faced with the strongest rise in costs since records began in 1986, data showed yesterday, raising the risk of a sharp consumer price spike.

The stronger than expected figures, which the Bank of England did not see before it cut interest rates to five percent last week, highlight the tricky balancing act facing policymakers this year as the economy slows but inflation accelerates.

The central bank is widely expected to cut rates again this year and policymakers argue a slowing economy will help tame inflation in due course, but they may find it harder to justify several more rate cuts if prices continue to surge higher.

"We maintain that so long as the credit crunch can be contained over the coming months, the Bank will remain cautious about cutting rates further," said David Page, an economist at Investec.

The Office for National Statistics said unadjusted output prices rose 0.9 percent on the month in March, taking the annual rate up to 6.2 percent, above analyst forecasts for a slight easing and the highest annual rate since May 1991.

Annual input price inflation also came in stronger than expected, rising to a record 20.4 percent in March from 19.9 percent in February. Analysts had expected a reading of 19.3 percent.

"This clearly illustrates inflation pressures building up at a producer level and heralds further CPI pressure over the coming months," Page said.

Consumer price inflation figures for March will be published on today and economists expect the data to show prices rising 2.6 percent on a year ago, up from 2.5 percent in February.

"Risks are skewed to the upside, with the early timing of Easter a possible source of upside pressures," said Luigi Speranza, an economist at BNP Paribas.

The BoE said it expects inflation to rise to around three percent this year before falling back towards two percent. The BoE's target is to keep inflation within one percentage point either side of two percent.