UK borrowing rates close in on last year’s ‘mini-budget’ crisis levels

UK borrowing rates close in on last year’s ‘mini-budget’ crisis levels

British Prime Minister Liz Truss attends a news conference in London, Britain, on October 14, 2022.

Daniel Leal | Reuters

LONDON – Borrowing costs in the UK are approaching levels not seen since the turmoil of the bond market crisis triggered by former Prime Minister Liz Truss’ catastrophic mini-budget.

New data on Wednesday showed that UK consumer price inflation fell less than expected in April. The annual consumer price index fell to 8.7% in April from 10.1% in March, well above consensus estimates and the Bank of England forecast of 8.4%.

As inflation continued to prove more stubborn than the government and central bank had hoped, and is now nearly double the comparable rate in the US and significantly higher than in Europe, traders have increased their bets that interest rates will rise further must be made in order to curb the price increase.

Most notably, core inflation – which excludes volatile energy, food, alcohol and tobacco prices – came in at 6.8% in the 12 months to April, up from 6.2% in March, raising the Bank of England’s concerns of firming of inflation amplified.

Strategists at BNP Paribas said in a note on Wednesday that the “broad strength” in UK inflation numbers made a 25 basis point hike in interest rates a “done deal” at the bank’s June meeting, raising its final rate forecast to 4.75 at % to 5%.

They added that “continued strength in inflation and potential concerns over second-round effects are likely to persist, leading to another 25 basis point rate hike in August.”

The Bank of England hiked interest rates for the 12th consecutive month earlier in the month, raising the policy rate to 4.5%, while the Monetary Policy Committee reiterated its commitment to containing stubbornly high inflation. The benchmark interest rate helps price a whole range of mortgages and loans across the country and affects the cost of borrowing for citizens.

This view was echoed by Cathal Kennedy, senior UK economist at RBC Capital Markets, who said the bank’s monetary policy committee could be accused of underestimating the “effects of the second round of inflation, which are currently fueling domestic inflationary pressures” and continue to do so underestimated.

“[Wednesday’s] “The CPI is likely to eliminate any debate about another bank rate hike at the MPC in June (currently our base case), but the market has moved beyond that and is now pricing in even more than two full 25 basis point rate hikes thereafter,” Kennedy noted.

On the back of these hawkish market bets, UK government bond yields continued to rise early Thursday. The yield on UK 2 year insurance climbed to 4.42% and the ten years The yield rose to nearly 4.28%, a level not seen since Truss and former Finance Minister Kwasi Kwarteng’s package of unfunded tax cuts wreaked havoc on financial markets in September and October last year.

According to the CIO, despite market certainty, there is a strong chance that there will be no Fed rate cuts this year