3 June 2026: UK public sector net debt is at 94.3% of GDP

The case for raising the Bank of England’s key interest rate grows stronger the longer the conflict in the Middle East continues, and action may be needed within the next few weeks, a member of the Monetary Policy Committee said yesterday.

The BOE left its key interest rate unchanged in April, and investors expect a closer decision when the MPC next meets on June 18.

Several policymakers have noted that the rise in government bond yields since the start of the conflict has already increased borrowing costs for households and businesses, which should help cool price pressures.

However, Megan Greene said the MPC can’t rely on markets to do its job, and yields will likely fall back if the BOE doesn’t raise the key rate.

“I think the case for hiking rates grows as the conflict wears on, and I believe a tightening in monetary policy over the next few weeks or months may be necessary,” she said in a speech.

Her comments suggest that Greene may vote to raise the key rate to 4% from 3.75% later this month. She said she had considered voting for a rise in borrowing costs at the April meeting.

The U.K.’s inflation rate fell to 2.8% in April from 3.3% in March. However, that was largely due to one-off measures announced by the Chancellor in November, and the Bank expects the inflation rate to pick up over the coming months.

What worries policymakers is that higher energy costs will prompt businesses to raise the prices of other goods and services. At the same time, workers will seek larger pay rises, a combination Central Bankers call ‘second-round effects’.

Some policymakers expect those effects to be weaker than in 2022, when Russia’s invasion of Ukraine led to a surge in energy prices. They argue that the U.K.’s jobs market is looser and the economy weaker than it was then.

Greene cautioned against that view, noting that households now have more recent experience of a price surge than they did in 2022 and may quickly come to expect that inflation will remain high unless the Bank moves to persuade them otherwise.

“There is a benefit in acting sooner; the speed of the response is arguably just as important as its size when trying to ensure that expectations remain anchored,” Greene said.

In a highly uncertain situation, some MPC members have expressed a preference to wait and see how the conflict develops before raising the key rate, worried that higher borrowing costs may unnecessarily weaken an already fragile economy.

But Greene said the greater danger is that households will get used to and continue to expect higher inflation.

“In my view, the risk of acting, even if inflation proves to be less persistent, is less severe than the risk of failing to act,” she said.

UK public sector net debt is now effectively 94.3% of GDP, the highest sustained level since the early 1960s. The latest official release from the Office for National Statistics puts the figure at 94.3% of GDP at the end of April 2026.

With debt close to 95% of GDP, even small increases in interest rates or inflation translate into large increases in the government’s financing costs.

The OBR’s March 2026 Economic and Fiscal Outlook highlights debt sustainability risks and the sensitivity of the fiscal position to interest‑rate shocks. However, strong tax receipts have helped reduce annual borrowing, yet the debt stock is so large that servicing it absorbs an increasing share of public spending.

UK budget headroom is evaporating, according to current market data. Global oil inventories are falling to what the IEA calls “critical” levels, directly eroding the fiscal space Rachel Reeves told Parliament she expected, according to her update last November.

Shrinking oil inventories push up crude prices, which fuels inflation. This, in turn, lifts gilt yields and debt-interest costs, reducing fiscal headroom.

The pound traded marginally higher yesterday as markets showed optimism that the Bank of England would soon raise rates, or at least make a hawkish statement at its next rate-setting meeting. Sterling rallied to a high of 1.3482 and closed at 1.3467.

The Commerce Department said last week that a widely watched measure of “core” consumer inflation, which excludes volatile food and energy items, was 3.3% over the past year. But a lesser-known gauge, “trimmed mean” inflation, which filters out the most extreme price moves, was just 2.3%.

Ordinarily, that more benign number would carry little weight in determining where the Fed and the markets expect interest rates to go. That may be about to change.

At his confirmation hearing in April, Fed Chairman Kevin Warsh urged the Federal Reserve to pay more attention to measures such as the trimmed mean, turning what had been a technical debate among economists into a live policy question.

The question is whether these alternative measures are better at filtering out the effects of tariffs, AI investment and geopolitical shocks to produce a more accurate (and, for now, benign) picture of where underlying inflation is headed. Or do they understate underlying price pressure because those same effects aren’t actually one-offs but persistent forces shaping the economy?

Warsh has signalled he favours the first interpretation. “What I’m most interested in is what the underlying inflation rate is, not what’s the one-time change in prices because of a change in geopolitics.”

The consumer price index, released by the Labour Department, tends to get the most headlines because it comes out early in the month and because Social Security payments, inflation-protected bonds, and private contracts are tied to it.

But Fed officials pay more attention to the Commerce Department’s personal-consumption expenditures price index, or PCE, which the Fed uses to define its inflation target. The measure captures a broader range of spending and adjusts for shifts in consumer spending as prices change. Overall PCE inflation was 3.8% in April. The “basket” method used by CPI is considered old-fashioned and outmoded.

Core prices receive the most attention because volatile food and energy prices can obscure the underlying trend. Warsh called that measure a “rough swag” or an approximation because it leaves in too many other one-off distortions.

Fed officials already consult a range of gauges that exclude outliers, such as a plunge in wireless phone prices or a one-off tariff bump. The trimmed mean makes this filtering more systematic.

Warsh didn’t specify which trimmed mean he had in mind. The most widely cited is the Dallas Fed’s version, which excludes categories accounting for more than half of consumer spending each month.

U.S. job openings rose in April, as the labour market appeared resilient despite economic uncertainty caused by the war in Iran.

U.S. employers posted 7.6 million job vacancies in April, the Labour Department reported on Tuesday, up from 6.9 million in March and the highest since May 2024. Economists had forecast just 6.8 million openings.

The department's Job Openings and Labour Turnover Survey (JOLTS) showed that layoffs fell, but so did the number of Americans quitting their jobs, a sign of confidence in their prospects. The report's measure of gross hiring also dropped in April, suggesting that companies remain reluctant to add new workers even as they hold on to the ones they have, given the uncertainties they currently face both domestically, from the impact of AI, and internationally, from the conflict in Iran, which may erupt again at any time.

The U.S. Dollar Index is attempting to extend its recovery while remaining trapped below a major resistance level. The next phase of the move may depend less on technical momentum and more on how investors interpret incoming labour market data.

Expectations for Federal Reserve policy have shifted noticeably in recent weeks, creating a more balanced debate about the direction of interest rates. That change is increasing uncertainty around the U.S. dollar, even as its broader recovery structure remains intact.

Yesterday, the dollar index traded between 99.33 and 99.05, closing at 99.22 as traders entered a wait-and-see mode ahead of this week’s data releases.

Higher core inflation in the Eurozone is setting the ECB up for a June tightening, and the latest data makes that case very clear. Core inflation has risen sharply, and services inflation, the ECB’s most important gauge of domestic price pressure, has accelerated enough to push policymakers towards action.

The rise in core inflation shows that inflation is no longer just an energy story. Markets see this as the trigger that forces the ECB to act. Rate markets are now fully pricing in a 25bp hike in June.

Analysts note the ECB may have a small credibility problem after being late to tighten in previous cycles. Research argues the ECB “has to send a signal”, meaning a June hike is the minimum needed to restore confidence.

The April minutes showed the decision to hold rates was a close call. Slovakia’s Peter Kažimír has described a June hike as “virtually certain,” citing spreading energy costs and no improvement in the Iran conflict.

The European Central Bank should keep its options open for its next interest rate decision in June, the departing governor of the Banque de France, François Villeroy de Galhau, said in his farewell speech.

“I have read a great deal of speculation and several statements about the timing of our next interest rate hike at the ECB,” he said, adding that this “strikes me as looking a bit too much like disguised forward guidance.”

What should guide us is not a date, but the data. Villeroy de Galhau is one of Europe’s longest-serving and most influential central bankers and will step down before the ECB sets rates on June 11.

French President Emmanuel Macron has nominated his former chief of staff, Emmanuel Moulin, to replace Villeroy de Galhau, who spent more than a decade at the helm of the Banque de France.

ECB president Christine Lagarde said policymakers had discussed an interest rate increase in April “at length and in depth” before unanimously deciding to hold off. Villeroy de Galhau said policymakers must focus on the “second-round effects” of the energy shock driven by the Middle East conflict.

Eurozone inflation rose to 3.2% in May, driven by a sharp increase in energy prices. According to data released yesterday, the figures were in line with forecasts from economists polled by Reuters. They confirm expectations of an interest rate hike by the European Central Bank next week. Energy inflation posted a record annual increase in May at 10.9%, up slightly from the previous month’s 10.8%.

In the services sector, inflation also rose from 3% to 3.5%. At the same time, food, alcohol and tobacco prices fell slightly, from 2.4% to 2%. Inflation varied widely across countries.

In Germany, Europe’s largest economy, annual inflation fell to 2.7%, while in Greece and Lithuania it exceeded 5%. In France, inflation rose from 2.5% to 2.8%.

As a major energy importer, Europe is particularly sensitive to energy crises. According to LSEG, markets are pricing in a 25-basis-point increase in the ECB’s key interest rate at the next meeting.

The Euro barely reacted to the inflation data, since a hike next week is already priced into the common currency’s current level. It climbed to a high of 1.1655 and closed at 1.1631.

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