The UK’s battered public finances are about to get even more stretched
The UK’s battered public finances are about to get even more stretched
Liam HalliganSun, June 14, 2026 at 6:00 AM UTC
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The Bank of England is expected to keep its benchmark rate at 3.75pc on Thursday, but probably not for long - Mike Kemp/In Pictures
Is the global interest-rate cycle turning? If it is, that has profound implications for Britain and the broader global economy.
During 2024 and 2025, central banks raised rates sharply to deal with post-pandemic inflation. Since then, they've been lowering benchmark borrowing costs to try to get the global economy moving.
But as inflation has reemerged, increasingly so with this US-Iran war pushing up energy prices, this prolonged worldwide rate-easing cycle has come to an end.
There are growing signs that this isn't just a pause – with further rates delayed but still in the pipeline – but an actual reversal. Are central banks across the world now set to put rates back up? If they are, that will ultimately weigh not just on economic growth, but also on financial markets.
The most important central bank is obviously the US Federal Reserve (Fed). When the Fed sets the benchmark price for borrowing in dollars – the world's reserve currency, still involved in almost 90pc of all foreign exchange transactions by value – that sets the tone for monetary policy worldwide.
US inflation hit 4.2pc in May, we learned last week – a three-year high and up from 3.8pc the previous month and 2.4pc as recently as February. This was largely because of rising motor fuel and energy costs. While the US is a major energy exporter, a blocked Strait of Hormuz drives up global fuel prices, which affect US firms and consumers.
On top of that, food price inflation is well above the Fed's 2pc target – and import tariffs are also generating price pressures. Meanwhile, GDP growth is robust at 1.6pc in the first quarter, and the jobs market remains strong.
All this is driving speculation that the Fed will soon raise interest rates. Having cut benchmark borrowing costs from 5.25-5.5pc in the summer of 2024 to 3.5-3.75pc in December, the US central bank now faces the highest inflation since April 2023, with signs of more price rises to come.
The credibility of Kevin Warsh, the new Fed boss, who replaced Jerome Powell in mid-May, is on the line. Hand-picked by Donald Trump, Warsh is the son-in-law of one of the president's most long-standing political donors.
In fact, with inflation having hovered above target for the last five years, the credibility of the Fed itself is in question, and with it, the broader notion of "independent" Western central banking – that is, placing inflation control above and beyond inevitable political pressure for lower rates.
"I love the inflation," said Trump on Wednesday, when questioned by reporters in the Oval Office. He clearly doesn't – and nor do American voters. That's why Trump looks set to lose the Republicans' majority in November's congressional midterm elections, which will make the remainder of his presidency even more difficult.
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All the more reason why Warsh and other Fed rate-setters need to act to show they won't bow to Trump. Financial markets are pricing in a Fed rate rise in autumn – with a 50pc probability. As and when that happens, the global rate cycle will have turned.
The European Central Bank (ECB) just raised its rates, the first G7 central bank out of the blocks. The ECB raised its benchmark rate by a quarter point to 2.25pc, abruptly ending a series of eight successive reductions. With eurozone inflation at 3.2pc in May, above the 2pc target for the third consecutive month, Christine Lagarde, the European Central Bank president, described the decision as "pretty obvious".
The Frankfurt-based central bank expects headline inflation to average 3pc this year. However, if oil prices soar higher this autumn, the ECB predicts inflation of 4pc, rising to 5.3pc in 2027.
The Reserve Bank of Australia has already raised rates three times this year to 4.35pc in response to this global energy shock, fully reversing last year's rate cuts. The Norwegian central bank also increased its benchmark rate by a quarter point to 4.25pc last month.
The Bank of Japan is expected to raise its main policy rate from 0.75pc when it meets this week, continuing its tentative increase cycle from negative territory. And while New Zealand's central bank isn't due to make any rate decision until early July, markets see a rise from 2.25pc as probable, with more later in the year.
As for the UK, the Bank of England will announce its latest rate decision on Thursday and is expected to keep its benchmark rate steady at 3.75pc, having lowered it from 5.25pc since the summer of 2024. But probably not for long.
If geopolitical tensions continue to fuel energy prices and inflation, a rate increase will almost certainly happen later this year – possibly as early as next month.
Headline inflation in May, when the number is released on Wednesday, will be 3pc-plus. And with producer price inflation of 5.3pc and 7.7pc in March and April respectively, supply-chain price pressures are building even if energy prices fall back, not least because of Labour's tax rises.
I still think 4pc inflation is probable this autumn, which means that if US rates rise, we could be looking at two increases from the Bank of England by the end of this year. That will impact not just mortgages, corporate loans and business investment. It will also impact politics.
That's because a policy-rate increase will also push up the cost of government borrowing, making the UK's already seriously stretched public finances even tighter. Not that Keir Starmer, Andy Burnham or whoever will be leading the Labour Party and the country by then has given "the turning of the global interest rate cycle" one moment's thought.
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Source: “AOL Money”
