Jeremy Hunt was dealt a double blow today as a smaller than expected fall in the rate of inflation hit hopes of a rate cut in June, while worse than expected public finance figures limited the Chancellor’s scope for a pre-Budget tax cut.
The Consumer Prices Index (CPI) — the headline measure of the rising cost of living — rose by 2.3% compared with City forecasts of 2.1%. Although a sharp fall from March’s figure of 3.2%, the “miss” was big enough to alarm City markets and send traders and economists to rewrite their expectations for rate cuts from the Bank of England.
Markets now predict that there is only a 13% chance of the first cut in interest rates coming in June, compared with almost 50% yesterday. Even the odds of an August move by the Bank are now seen as less than evens with a 60% likelihood that rates will be left at 5.25%.
Only by the September meeting of the Bank’s Monetary Policy Committee (MPC) are the chances of a cut judged to be higher than 50%. A rate cut is now only fully priced in for November.
The huge shift in sentiment will come as a blow to home owners hoping for an early easing of mortgage rates. The slight fall in the pricing of fixed rate deals seen over the past few weeks is now likely to be reversed as swap rates rise again.
Russ Mould, investment director at AJ Bell, said: “A slower than expected drop in the rate of UK inflation has spooked the market, pushing back the likely point at which the Bank of England will cut interest rates.”
Meanwhile latest public finance figures show the Government borrowed £20.5 billion in April, a figure only beaten by the pandemic years of 2020 and 2021 as well as 2012 when the Royal Mail pension scheme was transferred into the public sector.
The main factor behind the unexpectedly big jump in borrowing a £2.1 billion jump in social security payments to £27.1 billion, largely because of a 6.7% inflation-linked increase.
Borrowing in April was up £1.5 billion on last year and £1.2 billion more than the £19.3 billion forecast by the Office for Budget Responsibility.
