Sunak setback after hopes of rate cuts fade

RISHI Sunak’s hopes that cheaper mortgages will boost his election chances suffered a major setback yesterday amid signs interest rates will stay high for far longer than expected. The Bank of England is now expected to lower rates from the current 16- year high of 5.25pc, to 4.75pc by Christmas, with the first move not coming until August or September. At the start of 2024 financial markets were indicating there would be six rate cuts, starting in May. That would have taken rates down to 3.75pc. The dramatic change in outlook comes as global central banks battle to tame inflation having seen it spiral out of control in the wake of the pandemic and war in Ukraine. The European Central Bank yesterday held rates at 4pc in the eurozone, though it set the scene for a cut as soon as June. But in a stark warning to borrowers yesterday, Bank of England official Megan Greene said the first UK cut ‘should still be a way off’. And the head of the International Monetary Fund said central banks ‘must resist calls for early interest rate cuts’ or risk inflation roaring back.

The outlook for interest rates was reflected on the bond markets where the yield on ten-year UK gilts – a key measure of borrowing costs – rose above 4.2pc for the first time this year.

In the US, the equivalent yield hit 4.59pc, with the Federal Reserve now not expected to cut rates before September.

Rishi Sunak and Jeremy Hunt were hoping that lower inflation would lead to interest rate cuts in the UK this year.

Alongside tax cuts, Tory 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 the reality has dawned that central banks are going to err on the side of caution when it comes to claiming victory over 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, and is now 3.4pc having hit 11.1pc, it is rising in the US, casting doubt over rate cuts around the world.

‘In my view, rate cuts in the UK should still be a way off,’ wrote Megan Greene in the Financial Times.

IMF managing director Kristalina Georgieva added: ‘Where necessary, policymakers must resist calls for early interest rate cuts. Premature easing could see new inflation surprises that may necessitate a further bout of monetary tightening.

‘On the other side, delaying too long could pour cold water on economic activity.’