Hunt affected by inflation “failure” and social benefits law

Jeremy Hunt suffered a double blow today: a smaller-than-expected fall in inflation dashed hopes of a rate cut in June, and worse-than-expected public finance figures limited the Chancellor's scope for a tax cut before the Budget.

The Consumer Price Index (CPI) – the main indicator of rising living costs – rose 2.3 percent, compared to the City forecast for 2.1 percent. Although this was a sharp drop from March's reading of 3.2 percent, the “miss” was big enough to unsettle City markets and prompt traders and economists to rethink their expectations of interest rate cuts by the Bank of England.

Markets now see the probability of the first rate cut coming in June as just 13%, down from nearly 50% yesterday. Even the odds of the bank making a move in August are now seen as less than equal, with the probability of leaving rates at 5.25% at 60%.

It was not until the September meeting of the Bank's Monetary Policy Committee (MPC) that the probability of a rate cut was estimated at over 50%. A rate cut is now only fully priced in for November.

The huge change in sentiment will be a blow to homeowners hoping for a cut in mortgage rates soon. The slight decline in fixed-rate contracts seen in recent weeks is now likely to be reversed as swap rates are rising again.

Russ Mould, investment director at AJ Bell, said: “A slower than expected decline in the UK inflation rate has unsettled the market and pushed back the likely timing of a rate cut by the Bank of England.”

Meanwhile, the latest public finance figures show that the government was £20.5 billion in debt in April, a figure only exceeded in the pandemic years of 2020 and 2021, and in 2012, when the Royal Mail pension scheme was transferred to the public sector.

The main factor behind the larger-than-expected increase in borrowing is a £2.1 billion increase in social security payments to £27.1 billion, largely due to an inflation-linked increase of 6.7 percent.

In April, borrowings were £1.5 billion higher than a year earlier and £1.2 billion higher than the £19.3 billion forecast by the Office for Budget Responsibility.