Michael Simmons

This week Rachel Reeves ruled out a blanket energy bailout to manage the fallout from the Iran war. That’s the right approach. But her targeting of a bailout – reportedly to those on benefits – risks solidifying Britain’s welfare trap. When the Chancellor gave her economic update to the Commons on Tuesday following an emergency Cobra meeting, she took a potshot at Liz Truss. Not for the ex-prime minister’s mini-Budget but for her multi-billion-pound energy price guarantee that sent the gilt market into meltdown. ‘As we respond to this crisis, we must learn from the mistakes of the past,’ Reeves told MPs. The previous government pushed up borrowing, interest rates, inflation and mortgage costs with an unfunded, untargeted package of support under Liz Truss.

The Organisation for Economic Co-operation and Development (OECD) has just confirmed what we already knew: Britain will be hit harder than almost anywhere else by the economic fallout triggered by the war in Iran. Updated OECD forecasts released today slashed predictions of UK growth for this year to just 0.7 per cent from the 1.2 per cent previously expected. That’s a larger downgrade than any other G20 country. On inflation, the Washington-based organisation expects UK inflation to hit 4 per cent – the second highest in the G7. The causes are clear: an energy price hike, prolonged in nature, that simultaneously makes everything more expensive, reduces supply and destroys consumer demand. The result is even more stark: stagflation.

After a record tax take and surplus in January, normal service has resumed. Britain experienced its second-largest February borrowing splurge since records began, according to figures just released by the Office for National Statistics (ONS). Last month we borrowed some £14.3 billion, which was £2.2 billion more than a year before and the second highest figure for a February since records began in 1993. Tom Davies, senior statistician at the ONS, said: ‘While [tax] receipts were up last year, that was outweighed by a rise in spending.’ A large part of that jump in spending was our debt interest payments which, at £13 billion, was the highest ever recorded for February, as this rather striking graph shows: Some £4.

In a surprise to no one, the Bank of England’s Monetary Policy Committee (MPC) has voted nine-zero to hold interest rates at 3.75 per cent. The unanimous decision is the first time the MPC have been in complete agreement since September 2021. Before Trump and Israel’s bombs rained down on Iran, the markets had been overwhelmingly expecting a rate cut. This would have been welcome news for mortgage holders and the government. But with an energy price shock sending inflation expectations in the wrong direction, we are lucky the MPC didn’t hike rates this time. The markets are now expecting a rate hike towards the end of summer after inevitably higher energy prices lead to higher inflation.  Even before today’s announcement the mortgage market was feeling the pressure.

Figures just released by the Office for National Statistics (ONS) show the economy ground to a halt in January, with no growth recorded. That was despite economists and businesses reporting a brighter start to the year. Economists had expected January to see growth of 0.2 per cent. Over the three months to January we did see some growth, though just 0.2 per cent. Within that figure, services expanded 0.2 per cent while production grew 1.3 per cent. The positive numbers end there, however, with the construction sector contracting by 2 per cent. It’s unlikely things are going to get much better as the year goes on.

With Donald Trump signalling that he does not want a long war in Iran, markets have started to settle down. Traders are no longer betting on interest rate hikes, the FTSE is in the green and a barrel of oil is hovering around $90. Nevertheless, the pressure on the Chancellor to set out further financial support to tackle the cost of living is on. The average five-year fixed mortgage passed 5 per cent today for the first time since November, prices at the pumps have jumped at their fastest pace in four years, and Morgan Stanley is the latest bank to warn that inflation could hit 5 per cent later this year.  On petrol and diesel, Rachel Reeves is angry with service stations.

A few weeks ago I thought a March interest rates cut was ‘near certain’. Inflation was coming down and Bank of England rate-setters’ concerns about wage growth were being replaced by fears that higher rates were contributing to rising unemployment. In my defence, markets agreed: they priced the chances of a cut at over 80 per cent. But since then, the world – and markets – have changed. The graph below shows something called the ‘overnight index swaps’ curve. Without getting too deep into the mechanics, it can be understood as a proxy for where traders think interest rates are heading. As you can see, the line had been steadily dropping before Donald Trump’s action in Iran sent it shooting back up – implying that a March rate cut has become much less likely.