LONDON BRIEFING: UK government finances crimped as interest bill jumps

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UK government borrowing came in higher than expected in May, according figures from the Office for National Statistics on Thursday, and it is paying much more interest on that debt.

UK public sector net borrowing, excluding banks, amounted to £14 billion in May, down from £21.9 billion in April. However, the figure was higher than market expectations of £12 billion.

The ONS said the latest figure was £4.0 billion less than in May 2021, but £8.5 billion more than in May 2019, meaning before the virus pandemic. It was also the third-highest May borrowing since monthly records began in 1993.

The ONS said rising inflation sent interest payments on UK government debt up to £7.6 billion in May from £4.5 billion a year earlier.

It is the third highest debt interest payment in any month and the highest seen in any May since records began in 1993.

The ONS said the jump in UK debt interest payments is due to the recent surge in the retail prices index measure of inflation, which determines payouts on index-linked gilts.

So far this financial year, debt interest payments have totalled £14.1 billion, up £4.7 billion a year before, the ONS said.

But the worst is yet to come, PA reports, with the Office for Budget Responsibility forecasting that government debt interest payments will leap to £19.7 billion in June – the biggest on record by far – due to April's eye-watering increase in inflation.

Chancellor Rishi Sunak said: ‘Rising inflation and increasing debt interest costs pose a challenge for the public finances, as they do for family budgets. That is why we are taking a balanced approach – using our fiscal firepower to provide targeted help with the cost of living while remaining on track to get debt down.’

Inflation hit a 40-year high of 9.0% in April and official data on Wednesday showed it increased again in May, to 9.1%.

‘The wider-than-expected deficit in May meant that cumulative net public borrowing in the first two months of the year reached £35.9 billion, some £6.4 billion greater than the OBR's forecast,’ noted Daiwa Capital Markets.

‘If such underperformance against the OBR projections continues over coming months, scope for the government to provide extra fiscal policy support for the weakening UK economy in the autumn budget will be diminished.’

Here is what you need to know at the London market open:

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MARKETS

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FTSE 100: down 1.0% at 7,020.84

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Hang Seng: up 1.3% at 21,282.85

Nikkei 225: closed up 0.1% at 26,171.25

S&P/ASX 200: closed up 0.3% at 6,528.40

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DJIA: closed down 47.12 points, or 0.2%, at 30,483.13

S&P 500: closed down 0.1% at 3,759.89

Nasdaq Composite: closed down 0.2% at 11,053.08

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EUR: down at $1.0560 ($1.0592)

GBP: down at $1.2240 ($1.2303)

USD: soft at JP¥135.80 (JP¥135.89)

Gold: down at $1,834.20 per ounce ($1,841.20)

Oil (Brent): down at $110.60 a barrel ($111.14)

(changes since previous London equities close)

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ECONOMICS AND GENERAL

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Thursday's key economic events still to come

EU Summit of heads of state to discuss Ukraine and economy

0930 CEST Germany flash purchasing managers' index

1000 CEST EU flash PMI

0930 BST UK flash manufacturing and services PMI

0830 EDT US jobless claims

0945 EDT US flash manufacturing and services PMI

1000 EDT US Fed Chair Powell testifies before House Financial Services Committee

1030 EDT US EIA weekly natural gas storage report

1100 EDT US EIA weekly petroleum status report

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Train services were disrupted across Britain again on Thursday as thousands of railway workers staged their second strike of the week. Members of the Rail, Maritime & Transport union at Network Rail and 13 train operators walked out after talks failed to resolve a bitter row over pay, jobs and conditions. Just one in five trains are running on Thursday and these are mostly restricted to main lines, with around half of the network closed. Services started later than normal at 7.30am local time and will shut down early at 6.30pm. The UK government announced plans to change the law to enable businesses to supply skilled agency workers to plug staffing gaps during industrial action.

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Voters will go to the polls in by-elections in Wakefield and in Tiverton and Honiton, both triggered after the previous Conservative members of Parliament resigned in disgrace. The polls are seen as a key test for UK Prime Minister Boris Johnson's leadership two weeks after 148 of his own MPs voted in favour of his removal in a confidence vote.

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German Economy Minister Robert Habeck will declare the alarm stage of the emergency gas plan on Thursday morning, government sources have told dpa. Utility companies will not yet be given the opportunity to increase their gas prices under the Energy Security Act, however, the sources said. Germany is rushing to reduce its dependence on Russian energy as Moscow scales back gas supplies to Western nations in what is seen as retaliation for sanctions imposed over the war in Ukraine.

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Chinese President Xi Jinping appealed for peace in Ukraine while taking indirect aim at the West during comments made at the opening of the BRICS Business Forum. He said the war in Ukraine, which was initiated by Moscow in late February, has once again raised an ‘alarm for humanity’. Xi did not criticize fellow BRICS member Russia. Xi also did not mention the West and NATO by name. But he said that states would be in trouble ‘if they put blind faith in their strength, expand military alliances and seek their own security at the expense of others.’ ‘History has shown that hegemony, group politics and confrontations between blocs bring neither peace nor stability, but war and conflict,’ Xi said to the forum via video link.

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BROKER RATING CHANGES

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Morgan Stanley cuts Rio Tinto to 'equal-weight' (overweight) - price target 6,230 (6,410) pence

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Deutsche Bank raises Rentokil Initial to 'buy' (hold) - price target 550 pence

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Deutsche Bank cuts Intertek to 'sell' (hold) - price target 3,600 (5,640) pence

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COMPANIES - FTSE 250

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Online and high-street gambling operator 888 Holdings expects to report revenue of between £330 to £335 million for the six months to June 30. The FTSE 250 listing said the result is ‘broadly in line with board expectations’, with growth in some European markets offset by the effects of additional safer-gambling measures as well as the temporary exit from the Netherlands. In addition, 888 said William Hill revenue for the 26 weeks to June 28 is currently expected to be between £620 to £630 million. This performance reflects the re-opening of high-street retail operations, offset by the impact of increased safer gambling measures in UK Online. It expects to complete the deal for William Hill's UK assets on July 1, it added.

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Residential landlord Grainger has agreed to forward fund and buy the build-to-rent element of a Bristol development that is made up of 374 private rental homes, as well as 94 affordable homes and six commercial units. Grainger said it has agreed to acquire the scheme from Redcliff MCC, backed by ICG Real Estate in partnership with Madison Cairn for £128 million. Grainger said Winvic Construction has been appointed as contractor for the scheme. Winvic built Grainger's Brook Place development in Sheffield and is also delivering the Copper Works in Cardiff for Grainger. Grainger said construction is expected to commence in the third quarter, with practical completion of the final element targeted for early 2025. It expects that the scheme, including the commercial element, will generate a gross yield on cost of 6% once fully let and stabilised.

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COMPANIES - SMALL CAP

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boohoo has hired Shaun McCabe as its new chief financial officer to succeed Neil Catto, who will move to executive director, responsible for strategic projects. McCabe joins boohoo from Trainline, which said McCabe will step down from the role on September 15. Peter Wood, vice president of Finance, will become interim CFO whilst the process to appoint a successor is underway, Trainline said. The online ticketing platform also said it continues to make good financial and operational progress, growing strongly in the UK and internationally, and its expectations for the full year remain unchanged.

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Construction firm Galliford Try has won a position on the new Midlands Highways Alliance Plus Medium Schemes Framework 4. Galliford Try said the entire framework is valued at £1 billion and will run for the next four years, with the potential to extend for a further four years. Galliford Try has been a main contractor with MHA+ since 2014. CEO Bill Hocking commented: ‘The MHA+ framework is a key part of the strategy for our Highways business going forward. Throughout the country we have a strong track record of delivering fruitful, collaborative partnerships with local authorities, and we look forward to working with the MHA+ and its client authorities to making a lasting impact on infrastructure around the country.’

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COMPANIES - GLOBAL

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Novartis will invest $250 million over five years into the fight against neglected tropical diseases and the elimination of malaria. The Basel, Switzerland-based pharmaceutical company explained this investment came as part of its renewed commitment to the Kigali Declaration which aims to deliver the targets set out by the World Health Organisation on neglected tropical diseases.

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Thursday's shareholder meetings

Avacta Group PLC - AGM

Anglo Asian Mining PLC - AGM

Card Factory PLC - AGM

Cordiant Digital Infrastructure Ltd - AGM

Downing Renewables & Infrastructure Trust PLC - GM re placing and open offer

Eight Capital Partners PLC - GM re aligning 2022 bonds with 2026 bonds

GENinCode PLC - AGM

Ideagen PLC - GM re takeover by Hg Pooled Management

Longboat Energy PLC - AGM

Oxford Nanopore Technologies PLC - AGM

Puma VCT 13 PLC - GM re cancellation of listing & liquidation

RBG Holdings PLC - AGM

Tandem Group PLC - AGM

Union Jack Oil PLC - AGM

Zinnwald Lithium PLC - AGM

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