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Senior Market Analyst
UK government borrowing reached £24.5 billion in a single month, coming in £1.9 billion above the Office for Budget Responsibility's forecast. For UK borrowing and sterling, the result is a tug of war, with hotter inflation lifting Bank of England rate hike expectations while a weakening fiscal picture keeps downside pressure on the pound. Borrowing across the first half of the fiscal year has run about £6 billion ahead of official expectations, adding to concerns over the scale of public debt heading into the Budget.
Fiona Cincotta, StoneX Senior Market Analyst, has more than 15 years of experience trading and analyzing UK, European and U.S. markets. She covers forex, equities and commodities with a particular focus on UK and European macro themes, tracking how central bank policy and public finance data feed through to sterling.
UK government borrowing totaled £97.8 billion in the first half of the fiscal year, roughly £6 billion more than the Office for Budget Responsibility had anticipated. The latest monthly figure of £24.5 billion also beat expectations, overshooting the official forecast by £1.9 billion. Cincotta reads the data as a sign that "public finances are not in good shape" going into the Budget. Higher borrowing and a growing debt pile keep some downside pressure on sterling, fueling concerns over the scale of government borrowing. For the pound, that fiscal drag partly offsets the support it would normally draw from rising interest rate expectations.
"It does really suggest that inflationary pressures may be spreading more broadly through the economy, and that's something that Bank of England policymakers have been watching out for," Cincotta says of the rise in UK services inflation to 3.7%, its first increase in several months. Headline inflation rose to 3.5% from 3.1%, ahead of the 3.4% consensus, and core inflation also came in hotter than expected, firming up expectations of a 25 basis point Bank of England hike at its next policy meeting. Sterling barely moved on the release, however, because stronger-than-expected UK jobs data a day earlier had already done most of the hawkish repricing. With rate expectations largely settled, the borrowing overshoot carries more weight for the pound, limiting the upside that a hawkish Bank of England would otherwise provide.
--- Written by Frédéric Guétin, StoneX Media Producer
--- Expert: Fiona Cincotta, StoneX Senior Market Analyst
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