Meanwhile, June’s CPI print came in hotter than expected, with headline inflation rising to 3.6 % – the highest since January. The surprise complicates the case for meaningful rate cuts in the second half. Price pressures were broad based: April’s £25 billion rise in employer National Insurance (NI)contributions and a 6.7 % minimum wage hike are still filtering through; regulated rises in energy, water and transport added to the mix. Core CPI edged up to 3.7 per cent and services inflation held at 4.7 per cent, highlighting the stickiness. The BoE may still ease in August, but any cut will come with heavy caveats. For the Treasury, stubborn inflation erodes real incomes, dents tax receipts and pushes debt interest costs higher – just as fiscal room tightens ahead of the Autumn Budget.
Budget Jitters: Trouble Brewing
Public borrowing reached £20.7 billion in June, above the £17.5 billion forecast, as debt interest payments surged and tax receipts disappointed. Chancellor Rachel Reeves therefore enters the Autumn Budget with limited headroom and tricky choices. Her recent retreat on welfare reforms shows how fraught political decisions can be. With inflation hampering monetary policy and weak growth cramping fiscal options, the UK again walks a fine line between stability and stagnation. Markets will be keen to see where Reeves puts her weight: protecting capital spending, supporting households, or rebuilding fiscal buffers?
Labour market strains are emerging. Payroll employment has fallen for five consecutive months and unemployment has nudged up to 4.7 per cent. Wage growth, though still running at 5 per cent, is gradually cooling – but not quickly enough to give the BoE unqualified confidence. Growth figures have also disappointed: GDP shrank 0.1 per cent in May after a 0.3 per cent fall in April, confounding expectations of a modest rebound. Analysts point to higher NI costs and the drag from the US administration’s tariffs; firms that rushed to spend ahead of the tariffs are now retrenching.
Markets: Riding the Rapids into H2
As the year progresses, traders will watch sterling rates markets closely. Current pricing implies two further cuts in 2025, taking down the base rate to 3.75 per cent, yet any acceleration in the themes above could overturn that view. Softer labour or growth data would intensify pressure for stronger cuts, whereas persistent inflation would keep the BoE on hold. Longer-dated borrowers must gauge gilt market reaction to the Budget: sticking to fiscal rules should steady nerves, but sentiment remains fragile.
In FX, the pound has slid markedly against the euro this year, now around €1.15 – its weakest since late 2023 – and momentum could carry it to €1.14, a level rarely seen since 2020. Against the dollar, sterling has fared better, gaining early in the year before settling into a sideways range as uncertainty rises on both sides of the Atlantic. That mix brings two-way risk: a sharp move could materialise quickly if sentiment shifts in London or Washington.
For businesses, investors and policymakers, the message is stark: there are no easy answers. Conflicting domestic and global forces demand agility rather than certainty. The coming months will test the BoE’s patience, the government’s fiscal resolve and the market’s skill at pricing two-way risk.
