Economic pain

UK Prime Minister Rishi Sunak’s plans are out the window [View in browser]( [Bloomberg]( It’s all going wrong for Rishi Sunak and the UK economy. He made fighting inflation a central mission of his government, staking his premiership on halving it by the end of the year. But shock inflation figures this week triggered an unexpected 50 basis-point rise in interest rates from the Bank of England, to 5%. Money markets see rates heading as high as 6% next year, a nightmare for Britain’s mortgage-holders, many of whom now face soaring monthly payments. Key Reading: [Sunak Says UK Will Be ‘OK’ as Rate Hike Exposes Tory Tensions]( [Sunak Struggles to Contain Tory Anxiety Over UK Mortgages]( [Stubborn UK Inflation Triggers a Mortgage Crisis for Millions]( [Boris Johnson Stripped of Security Pass in UK Partygate Censure]( With a general election likely in 2024, this is not where the prime minister wanted to be. Just a few months ago, Sunak’s aides were buoyant, believing they had landed on a political strategy that might just overturn the opposition Labour Party’s 15- to 20-point poll lead in time for the election. Inflation would fall quickly, rates would settle, and public finances would improve, they reasoned, allowing Sunak to announce tax cuts to consolidate support for his governing Conservative Party. That plan is now out of the window. Sunak made clear this week that any tax cuts would have to be delayed until inflation eased. Even worse, the government’s economic advisers admit the country may have to be forced into a recession next year to get prices down. All this after weeks of political turmoil in which Boris Johnson resigned from Parliament over a report from fellow lawmakers that found he repeatedly misled the House of Commons as prime minister. That reopened Tory wounds that have festered since the UK’s contentious Brexit vote to leave the European Union seven years ago today. Sunak and his team know that high inflation, soaring interest rates and a recession aren’t a winning proposition in an election year. Unless something changes fast, his core scenario may have to shift from reviving the British economy and Tory election chances to mitigating pain and defeat. — [Alex Wickham]( Labour leader Keir Starmer next to shadow chancellor Rachel Reeves in Edinburgh on Monday.  Photographer: Emily Macinnes/Bloomberg [Sign up]( for our twice-weekly newsletter Next Africa. And if you are enjoying this newsletter, sign up [here](. Global Headlines Russian mercenaries killed in Ukraine are inadvertently helping stoke a new [cash boom]( at home in an unusual side-effect of the war. Money paid in compensation for their deaths — which adds up to 5 million rubles ($60,000) per person — usually comes stuffed in bags, according to women who traveled to pickup points around the country. - Senior US and EU officials will gather in Denmark this weekend with diplomats from countries including South Africa, India and Brazil in an effort [to engage]( with key states in the so-called global south that have remained mostly neutral on the war. - Russia has unexpectedly halted publication of detailed data on [budget spending](, casting public finances deeper into secrecy as the government wrestles with soaring costs linked to the war in Ukraine. Zambia reached an agreement in principle to restructure $6.3 billion of debt with bilateral lenders, setting a precedent for a growing list of countries struggling to service their liabilities. The accord marks the [first major relief]( won by a developing country under the Group of 20 nations’ Common Framework that brings the traditional creditor states of the Paris Club around the same negotiating table with China and India. Turkish President Recep Tayyip Erdogan and Israeli Prime Minister Benjamin Netanyahu [plan to meet]( as early as next month in Ankara as they try to improve their long-frosty relations, sources say. Once close military allies, their ties hit a low in 2010 when Israel raided a Turkish flotilla headed to the Gaza Strip. As Selcan Hacaoglu reports, the disruption to supply chains and commodity markets from Russia’s war is providing a fresh incentive to mend their relationship. - Turkey wants Sweden to begin extraditing or expelling [suspected Kurdish separatists]( before next month’s NATO summit to help win its support to join the security alliance, sources say. Best of Bloomberg Opinion - [Biden’s $9.2 Billion Ford Loan Is Aimed at China: Liam Denning]( - [Despite Modi Hype, India Isn’t the Next China Yet: John Authers]( - [Redo World Finance to Help the Poor? Bonne Chance: Mihir Sharma]( “The Cold War’s last frontier” is how the divide between North and South Korea has been dubbed, and both sides are [pouring money]( into drone programs to bolster their militaries along the frontier as they approach the anniversary of the start of their conflict in 1950. The cabinet in Seoul this week approved plans for a new drone command to be set up to provide what it called an “overwhelming response” to any provocations by North Korea’s unmanned aerial vehicles. South Korean army drones fly during joint military drills with the US in Pocheon on May 25. Photographer: Ahn Young-joon/AP Photo Explainers You Can Use - [Greeks Vote Again With Investment Grade Close: What to Watch]( - [About the Debate Over the US Supreme Court and Ethics]( - [How Pay Transparency Rules Impact the Gender Pay Gap]( India’s opposition parties are holding one of the [biggest meetings]( in a decade, with close to 20 groups discussing strategies to take on Prime Minister Narendra Modi in elections less than a year away. Deciding who will lead the group is a major hurdle. Political alliances are becoming increasingly crucial for the nation’s opposition parties that can’t afford to challenge Modi on the campaign machinery alone. - Modi told reporters in Washington after meeting with US President Joe Biden that he was “[really surprised](” to hear New Delhi’s commitment to democratic values questioned by Americans. Check out the Stephanomics podcast on why scientists and economists are worried about another knock-on effect from global warming: faster inflation. Listen [here]( and on [Apple]( and [Spotify](. News to Note - Republican pragmatists in the US House are beating back a rush by ultra-conservatives to [fast-track impeachments]( of Biden and other top government officials, intensifying GOP divisions. - Mexico’s top court invalidated the second half of an electoral reform supported by President Andres Manuel Lopez Obrador that had received [widespread criticism]( for requiring changes soon before the 2024 federal election. - Elon Musk’s Twitter needs to put more resources toward addressing [sensitive content]( if it wants to comply with strict new European regulations ahead of a deadline in August, Thierry Breton, the EU’s internal market commissioner, said. - Serbia and Kosovo [must announce new elections]( in all four municipalities of northern Kosovo “as soon as possible,” EU foreign policy chief Josep Borrell said after separate meetings with leaders of both countries. Pop quiz (no cheating!) Which former president went on trial this week accused of making false election claims? Send your answers to balancepower@bloomberg.net. And finally ... The UK is no stranger to rain, but just a month into summer the country is already being hit by water [shortages](. Unusually high temperatures have driven demand to record levels and the national weather office sees double the normal chance of a scorching summer like last year, when parts of Britain reached 40C (104F) amid widespread drought. As Eamon Akil Farhat writes, that means the next few months will be a test for the government and for industry. The dry bed of the Woodhead Reservoir near Glossop in June. Photographer: Oli Scarff/Getty Images Follow Us Like getting this newsletter? [Subscribe to Bloomberg.com]( for unlimited access to trusted, data-driven journalism and subscriber-only insights. Want to sponsor this newsletter? [Get in touch here](. 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