Inflation news – live: Fears of ‘shock-and-awe’ Bank of England hike as mortgage rates climb

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 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.”

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.

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.”

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:

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:

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”.

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.”

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.