Should we be panicking about UK debt sustainability now?
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Should we be panicking about UK debt sustainability now?

Financial markets reacted calmly to news of an early UK election, expecting whoever wins to stick to the fiscal rules. But whoever wins must also cope with rising debts and onerous interest payments.

Photo: Reuters

There was a big surprise in the UK last week. On May 22, the Office of National Statistics (ONS) reported that UK core consumer price inflation (excluding energy, food, alcohol and tobacco) rose by 3.9% in April.

That is down from 4.2% in March. But the consensus expectation had been that the rate of price rises would come in sharply lower, at closer to 3.6%.

Stickier core inflation makes early rates cuts less likely. Yields on 10-year gilts rose 11 basis points on the news. And while plenty of investors still like the combination of generous yields and the prospect of rate cuts, the longer those are delayed, the more onerous the cost of servicing the UK’s hefty sovereign debt.

There was something else the next day too.

Late on Thursday, May 23, UK prime minister Rishi Sunak announced a surprise early general election on July 4. Many of his own party had expected him to hold on at least until the autumn, if not until next January, in the hope falling UK inflation might allow the Bank of England to cut rates and spread a feel-good factor among voters.

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