7 April 2026: The two-child benefit cap ends

With the start of the Government's new fiscal year, several of the Chancellor's announced changes have come into effect, with the end of the two-child cap on child benefit and an increase in the state pension.

Some 480,000 families with three or more children will get an average rise of £4,100 a year. These were the most significant changes that were promised when Labour were elected almost two years ago.

The cap, introduced by the Conservatives to limit child benefits to the first two children in most families, is being abolished for £3.5 billion a year to taxpayers.

The Opposition has criticised Labour's decision to scrap the two-child cap, which is worth £3,647 per child per year, warning it will 'cost billions, reward worklessness and leave working families picking up the tab'.

Research by the Conservatives suggests the benefit windfall may be heavily concentrated, with jobless families in large urban areas set to receive more than £ 200 million in extra child benefits annually.

The biggest families could receive over £10,000 a year in extra benefits.

The Tories said that the overall cost of lifting the cap will be 'funded by Labour's endless tax rises on working families and businesses'.

Kemi Badenoch said: 'While working people struggle with rising fuel and food prices, Keir Starmer is giving another handout to those on benefits.

'The Conservatives believe in fairness and that those on welfare should have to make the same choices about their family as those who aren't.

'That's why we would reinstate the two-child cap and use the savings to bolster our Armed Forces.'

The cap, introduced in 2017 and limiting parents to claiming universal credit or tax credits for only their first two children, was axed by Chancellor Rachel Reeves in her last Budget.

Labour claims lifting the cap will pull 450,000 children out of poverty immediately.

However, analysis last week suggested hard-pressed families could be almost £1,000 worse off this year as they face across-the-board rises in their bills in what has been dubbed 'Awful April'.

In a more optimistic economic report published yesterday, the UK could receive a £30 billion annual boost from proposed government defence spending increases by 2045, according to a recent analysis. Raising defence expenditure to between 3.5% and 5% of GDP by 2035, up from the current level of 2.5%, is expected to deliver “significant long-term benefits” for UK growth and productivity, EY has found.

The Big Four professional services firm stated that this was due to the “relatively self-sufficient structure” of the UK defence industry and the way spending is typically distributed within the domestic economy.

EY’s UK chief economist said: “If spent appropriately, increased defence budgets provide a dual opportunity to bolster UK security and generate lasting economic benefits that support the government’s growth agenda.”

The prime minister pledged at the Nato summit in June 2025 to spend 5% of GDP on “national security” by 2035, including 3.5% on “core defence,” amid an increasingly turbulent geopolitical environment and pressure from Washington on allies to raise spending.

However, the Treasury and the Ministry of Defence are yet to set out a pathway. The Government’s delayed ten-year defence investment plan had been expected last autumn, following the publication of its strategic defence review last summer, but has been repeatedly postponed because of a £28 billion funding gap in its defence budget over the next four years.

There was no major investment in defence planned in Labour’s election manifesto so the OBR will be looking at the affordability of the plans. It is expected that the funds will be raised by further tax increases further down the road, but there has not been a change of Government by then.

Last week, before the Easter Holiday, Sterling had tried to rally as risk appetite improved, given the expectation of an end to the conflict in Iran or at least an extended ceasefire. It reached 1.3364. However, Donald Trump's threat to give Iran until later today to reopen the Strait of Hormuz to shipping caused any positivity to evaporate, and the pound fell back to close at 1.3199.

The past six weeks have posed great challenges for investors. The Dow and Nasdaq Composite both briefly entered correction territory, while the S&P 500 hovered near a double-digit decline. Although the immediate cause is linked to uncertainties surrounding the war in Iran, it is the longer-term effects on U.S. inflation that should keep Wall Street on edge.

Shortly after this conflict began, Iran closed the Strait of Hormuz to most oil exports. This presents a problem to the global economy, as around 20% of the world's energy was transported through the Strait each day, according to the Energy Information Administration.

The law of supply and demand states that when demand exceeds supply, prices will increase until demand drops. The reaction in the oil market has been swift, with crude oil prices rising sharply following this near-closure.

Most U.S. consumers have felt the impact of higher oil prices at the petrol station. Over the past month, as of 2 April, the national average price of a gallon of regular petrol has increased by 36% to $4.08. The rise has been even sharper for diesel, which has jumped 46% to $5.51 per gallon.

While higher petrol prices are recognised to harm consumers' finances, it is the inflationary effect of this historic energy supply shock that could destabilise the stock market.

With Trump flip-flopping between threatening to “bomb Iran back to the Stone Age” and then telling major consumers of imported oil that it is not America’s problem, it is hard to find any positivity that prices will fall anytime soon. Economists are now modelling what effect the war will have should it last until the start of Autumn or, possibly, the end of the year.

Their models do not paint a pretty picture.

Nonfarm Payrolls (NFP) in the United States (US) rose by 178K in March, according to data released by the US Bureau of Labour Statistics on Friday. The figure marks a notable rebound from February’s 133K decline (revised from -92K) and significantly exceeds market expectations of a 60K increase.

Overall, though, this was still clearly a better-than-expected report and one that justifies the Fed's current wait-and-see approach, as it assesses how persistent the oil price shock will be and how likely it is to spill over into other areas of inflation.

Any change in rates is “off the agenda” for now, with the next FOMC meeting due to begin on April 28th, the situation, at least as far as the Fed is concerned, will remain fluid.

Chicago Fed President Austan Goolsbee is sounding much less optimistic about interest-rate cuts, warning Friday that the war in Iran has caused an energy shock that could reignite inflation and delay decisions on expected 2026 cuts into 2027.

That marks a stark shift from his earlier stance, when multiple cuts still seemed achievable this year. He pointed to rising fuel costs and a new layer of uncertainty that is now obscuring the disinflation story markets had been relying on.

Goolsbee said the new energy shock "complicates that picture" and could start "pushing these decisions off to 2027 at the earliest." He told reporters that he had previously anticipated multiple cuts in 2026, but the recent jump in oil and fuel prices has him treading more carefully. Goolsbee also stressed that he was offering his own view, not speaking on behalf of the entire Federal Reserve.

Traders are already making adjustments. Futures markets have reduced the likelihood of rate cuts this year and, in some cases, indicate a higher probability of a rate hike. The CME Group's FedWatch tool is signalling a similar message, showing near certainty that policymakers will keep rates steady at the April meeting and a significant decline in implied cut probabilities for 2026, evidence that investors remain on the sidelines until clearer signs emerge that inflation is easing.

The dollar index was buffeted by the situation in Iran and Trump’s need to impress with his often completely contrary opinions on the markets.

The index ended last week almost unchanged at 100.18, having traded between 100.64 and 99.21.

European Central Bank Governing Council Member Yannis Stournaras said yesterday that appropriate Eurozone monetary policy will depend on the scale and nature of energy supply disruptions stemming from the conflict in Iran.

If the energy price spike proves temporary, the need for a monetary policy adjustment will be limited, Stournaras, who is also Governor of the Bank of Greece, said at an annual shareholders' meeting of the Greek Central Bank in Athens.

He added that a tighter monetary policy stance would be expected if the pressure from rising energy prices proves to be stronger and more persistent, affecting medium-term inflation expectations and wage developments.

Inflation in the Eurozone rose to 2.5% in March 2026, reflecting renewed price pressures mainly driven by increasing energy costs.

The latest figures showed that inflation grew by 0.6% from February, marking a sharp rebound after months of moderation across the currency bloc.

The rise was wholly attributed to higher energy prices, which surged to 4.9%year-on-year. This marks the first annualised increase in energy costs in nearly a year, amid rising geopolitical tensions involving the United States, Israel, and Iran, which have unsettled global energy markets.

Despite the overall rise, underlying inflationary pressures eased across key sectors of the economy.

Across major economies in the bloc, including Germany, France, Spain and the Netherlands, inflation trends strengthened in March, reinforcing the broader regional pattern. However, Italy recorded stable inflation during the period. Analysts say the latest data presents a complex challenge for policymakers, as they attempt to balance rising external price shocks against easing domestic inflationary trends.

The European Central Bank is once again at the centre of market attention as inflation in the euro area reaccelerates.

ECB President Christine Lagarde has adopted a cautious tone. The deposit rate remains at 3.25%, and there are no immediate changes. However, the message is clear: the ECB is monitoring the situation closely. If energy-driven pressures start to push into broader inflation, the Central Bank is prepared to act. Current thresholds remain just below critical levels, with core inflation at 2.7%.

The risks are increasingly skewed; markets are pricing roughly a 55% chance that tensions will persist, potentially disrupting 8–12% of global oil supply through Q3.

If headline inflation exceeds 4.5% by June, unlikely but clearly possible, the ECB will be compelled to raise rates as early as July, a scenario currently priced in at around 40%. That trajectory would probably delay rate cuts further into 2027, while slowing growth to approximately 0.5% and pushing bond yields above 3%.

The potential candidates to replace Lagarde, should she choose to leave the ECB before her term ends next year, have been fairly natural in their view of monetary policy. As one would expect, Joachim Nagel and Klass Knot have made fairly hawkish statements, while Pablo Hernández de Cos prefers a wait-and-see approach.

The "stagflationary" tilt, stagnant growth combined with high inflation, is especially troubling for the manufacturing-heavy economies of the Eurozone. The current crisis is not merely an inflationary event but a fundamental blow to the region’s terms of trade. As input costs remain high and supply chain disruptions persist, the risk of a deeper downturn in industrial activity increases, particularly if global demand begins to weaken amid regional pressures.

The euro behaved as expected during the current bout of risk appetite see-sawing. It traded between 1.1627 and 1.1443 last week and closed at 1.1518

Have a great day!