Jeremy Hunt will deliver his maiden Budget on Wednesday against a backdrop of falling global inflation and lower predicted borrowing costs as pressure grows for him to abandon a tax raid.
The Chancellor will pledge to deliver “long term, sustainable growth” a day after official figures showed US inflation fell in February, in a boost for hopes that a downturn in developed economies can be avoided.
Data showed price rises falling from an annual rate of 6.4pc in January to 6pc in February, cementing bets that the Federal Reserve will not have to step up the pace of rate increases to keep a lid on prices.
Lower American borrowing costs are likely to bring down the peak for interest rates across the Western world.
Stock markets climbed and the dollar weakened against other currencies as traders also wagered that the worst of the turmoil was over following the collapse of Silicon Valley Bank (SVB).
The FTSE 100 in London closed up more than 1pc, while the S&P 500 rose almost 2pc amid a recovery in bank stocks a day after some smaller US lenders lost more than half their market value.
The picture suggests an increasingly benign economic environment for Mr Hunt’s Budget, but he is still expected to press ahead with an increase in corporation tax and other measures intended to steady the public finances despite resistance from senior Tories.
Sources suggested that the Chancellor does not intend to change course even though the Office for Budget Responsibility (OBR), the Government’s own spending watchdog, is likely to significantly row back on bleak forecasts it presented last year in the wake of the mini-Budget.
Mr Hunt will be helped by favourable interest rate and UK gilt yields projections used by the OBR to compile its forecasts.
The predictions are based on rates in the immediate aftermath of the Bank of England’s latest meeting, where Governor Andrew Bailey signalled policymakers would not lift borrowing costs much higher than the current rate of 4pc.
Traders are currently betting that the Bank will raise interest rates one more time before pausing. A week ago, financial markets priced in a peak of as much as 4.75pc this year.
A widely-expected move to keep typical energy bills capped at £2,500 for an extra three months will also bring the headline inflation rate down towards the Bank’s 2pc target more rapidly.
A drop in rate rise expectations over the past week could also make mortgages cheaper.
Swaps – which are used to price fixed-rate mortgage deals because they factor in bets on future UK interest rate moves – have fallen as investors bet on slower rate rises.
On March 10, two- and five-year swaps were priced at 4.57pc and 4.04pc respectively. On March 14, these had fallen to 4.28pc and 3.88pc.
If the lower two-year swap rate is sustained and translates directly into a drop in mortgage costs, this would save the average borrower £50 a month in interest payments on a typical £200,000 loan.
Aaron Strutt, of Trinity Financial, a mortgage broker, said: “Lenders know they will have to work harder to attract borrowers so when they get the chance to lower their rates, they will.”
The collapse of SVB rocked global financial markets and prompted investors to reevaluate predictions that global interest rates would head much higher to control inflation owing to fears of global contagion.
US officials raced last weekend to guarantee deposits and restore public confidence following the failures. The UK division of SVB was bought by HSBC for £1.
The US Department of Justice and the Securities Exchange Commission have since opened separate probes into SVB’s demise, the Wall Street Journal reported. Both investigations are reportedly in early stages and may not result in charges or allegations of wrongdoing.
Panic over the financial system eased on Wednesday, with some of the lenders hit hardest by the sell-off a day earlier regaining a significant portion of their losses.
Shares in First Republic Bank surged by 61pc at the opening bell on Tuesday after declining as much as 70pc on Monday. PacWest Bancorp jumped 54pc and Western Alliance climbed 42pc.
Despite calmer markets, concern persisted over the industry. On Tuesday, ratings agency Moody’s warned of a “rapid deterioration” in US banking as it cut its outlook for the entire sector to negative.
Meanwhile, the Swiss bank Credit Suisse said that “material weaknesses” had been identified in its accounts, sending shares to a new record low.
Moody’s said it was revising its outlook in light of the collapse of SVB last week, adding that there had been a “rapid and substantial decline in bank depositor and investor confidence” that forced regulators to enact emergency rescue measures.
Moody’s said: “We have changed to negative from stable our outlook on the US banking system to reflect the rapid deterioration in the operating environment following deposit runs.”
The failure of SVB also sparked debate in the Treasury about whether Mr Hunt should remove mentions of the words “Silicon Valley” from his Budget speech, according to Bloomberg.
Officials are worried that any comparisons with the American innovation hub, as Mr Hunt outlines plans to boost science and technology, will now be confused with the bank that was named after it.