Inflation news – live: Fears of ‘shock-and-awe’ Bank of England hike as mortgage rates climb
Markets brace for Bank of England rate hike of 0.5 per cent, as cost of government borrowing also hits new 15-year high
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Your support makes all the difference.Gloomy new inflation figures have raised market fears of a “shock-and-awe” interest rate hike of 0.5 per cent by the Bank of England on Thursday, spelling further pain for homeowners with mortgages.
Inflation unexpectedly remained frozen last month on 8.7 per cent, the Office for National Statistics said on Wednesday morning, with core inflation – which excludes items such as food and energy – hitting its highest level for 31 years.
As a result, markets are now betting more heavily that the central bank will push its base rate to 5 per cent this week instead of a less severe move to 4.75, with chancellor Jeremy Hunt saying that government “will not hesitate in our resolve to support the Bank as it seeks to squeeze inflation”.
With these worsened expectations yet to be priced into existing mortgage deals, Moneyfacts figures showed the average rate of a two-year fixed deal had already risen to 6.19 per cent on Wednesday – up from the 6.01 figure which prompted warnings of a “mortgage disaster” on Monday.
Government borrowing could overshoot OBR forecasts by £20bn, claims analyst
Expectations of higher interest rates could see government borrowing overshoot the Office for Budget Responsibility’s forecasts by as much as £20bn, one analyst has warned.
In remarks after the cost of government borrowing on two-year gilts hit a new 15-year high, chief economic adviser to the EY Item Club, Martin Beck, said: “At the next fiscal event in the autumn, the official forecaster will likely deem the government in breach of its fiscal rules based on current policy.
“The chancellor would likely respond by adding more post-election spending cuts on top of a spending squeeze that already looks challenging. So the true medium-term path for fiscal policy is unlikely to emerge until the first Budget after the election.”
Bank of England will be cagier about future rates than last November, says analyst
Bank of England officials “will be reluctant to offer any firm guidance” on future rates in case of “further inflation surprises”, one analyst has suggested.
ING developed markets economist James Smith said: “It’s another month where UK inflation has come in dramatically higher than expected and that all but guarantees another rate hike from the Bank of England tomorrow.
“When rates got this high last November, the Bank of England offered some rare pushback against market expectations and signalled a lower peak for rates.
“This time, with inflation consistently coming in hotter than expected, we suspect officials will be more reluctant to offer any firm guidance on what comes next.
“Policymakers won’t want to steer market rate expectations lower, only to find that further inflation surprises force it to go further than it would like over the coming months.”
Average house prices in April were £9,000 higher than previous year, ONS finds
Annual house price growth is running at around one quarter of the rate seen last summer, according to the Office for National Statistics.
At £286,000, the average UK house price in April this year was £7,000 below a recent peak in September 2022, with house prices having increased by 3.5 per cent on average in the 12 months to April, according to the ONS – down from a peak of 14.2 per cent in July 2022.
Volatility in the figures for 2021 and 2022 reflects house price movements around changes in stamp duty in 2021, the ONS said.
The annual increase in property values also slowed in April compared with the previous month, when a 4.1 per cent rise was recorded. The average UK house price in April 2023 was £9,000 higher than 12 months earlier.
‘Shock-and-awe 0.5% rise’ cannot be ruled out, says analyst
A “shock-and-awe” rise of 0.5 per cent in the Bank of England’s base rate tomorrow cannot be ruled out, an analyst has warned, with markets as of this morning viewing such a move as more likely than a smaller increase of 0.25 (see post at 9:05am).
Rob Morgan, chief investment analyst at Charles Stanley, said: “With prices showing little response to the Bank of England’s twelve successive interest rate rises, today’s figures seal a further increase in interest rates at the Monetary Policy Committee’s next meeting tomorrow from the current level of 4.5 per cent.
“An increase to 4.75 per cent is all but nailed on, but a shock-and-awe rise of 0.5 per cent to 5 per cent cannot be ruled out. The Bank of England will likely maintain tight policy for the remainder of the year, meaning further interest rate rises and no significant rate cuts until 2024.”
Average mortgage rates continue to rise
Mortgage rates have continued to rise today, figures suggest, even without this morning’s gloomy expectations of a further rise in the Bank of England’s base rate.
According to figures from Moneyfactscompare.co.uk released on Wednesday, the average two-year fixed residential mortgage rate is 6.15 per cent and the average five-year fixed residential mortgage rate is 5.79 per cent.
There were 4,498 residential mortgage products available on Wednesday. This is down from a total of 4,641 on Tuesday, Moneyfacts said.
Here was the outlook from mortgage brokers on Monday, when the average rate of a two-year fix was at 6.01 per cent:
UK ‘hurtling into mortgage disaster’ as rates near highs seen during Truss turmoil
‘No one’s at the helm of the ship, we don’t know where we’re going to end up,’ warns one mortgage broker
Watch: Government 'sticking to its guns', says Jeremy Hunt despite frozen inflation
Interest owed on government debt in May was £700m above watchdog’s forecast
This morning’s ONS figures also revealed that the interest payable on central government debt was £7.7bn in May – which is £200m less than a year ago, but £700m more than forecast by the Office for Budget Responsibility (OBR).
Borrowing in the first two months of the financial year so far has already reached £42.9bn – £19.6bn more than in the same two-month period a year ago and £2.1bn higher than the £40.8bn predicted by the OBR.
But the ONS said it has revised down its estimate for borrowing in the previous financial year to March 2023 by £3 billion to £134.1bn. This is still £11.8bn more than in 2021-22 and remains the fourth highest borrowing figure since monthly records began.
You can read more details here:
UK debt exceeds 100% of GDP for first time since 1961 – ONS
The Office for National Statistics said net debt reached £2.6 trillion as of the end of May, estimated at 100.1% of gross domestic product.
UK debt exceeds 100% of GDP for first time since 1961
The UK’s debt pile reached more than 100 per cent of economic output for the first time since 1961 as government borrowing more than doubled in May, this morning’s figures suggest.
The Office for National Statistics said net debt reached £2.6 trillion as of the end of May, estimated at 100.1 per cent of GDP, having shot up from around 84 per cent as the government responded to the coronavirus pandemic in March 2020.
Samuel Tombs, of the Pantheon Macroeconomics consultancy suggests that “pre-election tax cuts no longer look feasible”.
Bank of England ‘needs to create a recession’, says government adviser
A member of chancellor Jeremy Hunt’s economic advisory council has claimed that the Bank of England has “been too hesitant” about raising interest rates and needs to “create a recession” to curb inflation.
JP Morgan’s Karen Ward told BBC Radio 4’s Today programme there are “certainly signs” that a price-wage spiral is emerging, which the central bank “has to nip in the bud”.
“The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession.
“They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’. It’s that weakness in activity which eventually gets rid of inflation.”
Two-year gilt yields hit new 15-year high as cost of government borrowing increases
The amount the government pays to borrow has surged following the publication of ONS figures suggesting inflation proved more persistent than expected.
The interest rate for two-year gilts peaked at a fresh 15-year high of nearly 5.09 per cent, considerably above the peak of 4.8 per cent hit during the Liz Truss mini-Budget meltdown last September.
Gilts are essentially IOUs issued by the Treasury when it wants to borrow money.
Longer-term gilts also rose during the morning.
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