Setback for Sunak as interest rate cut hopes fade

Rishi Sunak’s hopes that cheaper mortgages will boost his electoral chances suffered a major setback yesterday amid signs that interest rates will remain high for much longer than expected.

The Bank of England is now expected to cut rates from the current 16-year high of 5.25 per cent to 4.75 per cent by Christmas, with the first move not coming until August or September.

At the beginning of 2024, financial markets were indicating that there would be six rate cuts starting in May.

That would have reduced rates to 3.75 percent. The dramatic change in outlook comes as global central banks struggle to control inflation, having seen it spiral out of control following the pandemic and the war in Ukraine.

The European Central Bank yesterday kept rates at 4 percent in the eurozone, although it prepared the ground for a cut as early as June.

But in a stark warning to borrowers yesterday, Bank of England official Megan Greene said the first UK cut “should still be some way off”.

And the head of the International Monetary Fund said central banks “must resist calls for early interest rate cuts” or risk inflation soaring again.

The outlook for interest rates was reflected in bond markets, where the yield on Britain’s 10-year bond – a key measure of borrowing costs – rose above 4.2 percent for the first time this year.

In the United States, the equivalent yield reached 4.59 percent, and the Federal Reserve is now not expected to cut rates before September.

Rishi Sunak and Jeremy Hunt expected lower inflation to lead to interest rate cuts in the UK this year.

In addition to the tax cuts, conservative strategists believed this would boost the economy and their chances in the general election.

Laith Khalaf, head of investment analysis at AJ Bell, said: “Markets are now pricing in just two rate cuts this year as there is a realization that central banks are going to err on the side of caution when it comes to claiming victory.” on inflation”. .

“Whether we get one, two or three cuts, consumers and businesses should not expect a return to the era of ultra-cheap money.” Although inflation is falling in the UK, now at 3.4 per cent, having hit 11.1 per cent, it is rising in the US, casting doubt on rate cuts around the world. .

“In my view, UK rate cuts should still be some way off,” Megan Greene wrote in the Financial Times.

IMF Managing Director Kristalina Georgieva added: ‘Where necessary, authorities should resist calls for early interest rate cuts. Premature easing could generate new inflationary surprises that could require a new episode of monetary adjustment.

“On the other hand, delaying too much could pour cold water on economic activity.”