The FTSE 100 ticked down ahead of an interest rate announcement from the European Central Bank (ECB) as rampant inflation pushed UK government borrowing to a record high.

The blue-chip index drifted 0.5%, or 35 points, lower at 7,229 as the Office for National Statistics (ONS) reported a record £19.4bn of interest payments were made on government debt in June. It was the second highest ever month for public sector net borrowing at £22.9bn, up £4.1bn on last year.

The figures come a day after UK inflation hit a fresh 40-year high of 9.4%, which is not only weighing on households and businesses, but pushing up the cost of servicing national debt.

Victoria Scholar, head of investment at Interactive Investor, noted a quarter of UK government debt is index-linked gilts pegged to the retail price index.

‘Clearly 40-year high inflation is taking its toll on the public purse, lifting debt to levels not seen since the 1960s,’ she said. 

‘Looking ahead, although tax receipts rose by £18.9bn year-on-year, the threat of economic recession could put a further strain on the government’s finances if tax receipts decline.’

Markets also had one eye on the ECB, which is expected to hike rates for the first time in 11 years, which Scholar said would end its ‘experiment with negative interest rates’. Financial markets are pricing in a 25 basis points hike although a 50 basis point increase remains a possibility amid pressure to follow the US Federal Reserve and other central banks’ more aggressive moves.

Dechra Pharmaceuticals (DPH) fell to the bottom of the blue chips. Its shares fell 6.6%, or 248p, to £34.82 after the veterinary products group said it planned to raise £184m to acquire Piedmont Animal Health, a US maker of animal medicine products. 

BAE Systems (BAES) struggled, down 1.8%, or 15p, at 788p despite rumours it was in talks with the Czech government over providing fighter jets and announcing a collaboration with Italy on future combat air systems.  

Pharma giants Astrazeneca (AZN) and GSK (GSK) lost 1.6% and 1.4% respectively, despite positive analyst sentiment on the latter.

The FTSE 250 just pushed into the black, up 0.2%, or 37 points, to trade at 19,436. Frasers Group (FRAS) led the mid caps higher, jumping 14.2%, or 106p, to 856p after reporting bumper profit for the past year despite a ‘significant increase’ in its running costs. The Sports Direct owner reported a pre-tax profit of £344.8m, improving from a loss of £39.9m the year before, and expects profits to come in at between £450-500m this year.

Moneysupermarket (MONY) added 5.6%, or 10p, to trade at 203p after the comparison site posted better-than-expected results due to a surge in demand for bank comparison services. IG Group (IGG) also benefited from strong results; the trading platform was up 4.3%, or 31p, at 742p after net trading revenue jumped 16% in 2022.

3i confident

3i Group (III ) rose 1.6% to £12.16 on a 15% discount to asset value after the £11.7bn private equity fund cut the value of its stakes in German online retailers Luqom and Gartehnaus but declared a 6.6% first quarter return, saying discount retailer Action, its biggest investment, was growing at an impressive rate and its private equity portfolio was resilient as economic conditions worsened.

In other investment company news, Harbourvest Global Private Equity (HVPE ) gained 1.9% to £21.59 on a wide 46% discount as net asset value rose 1.5% in June with 90% of its unquoted investments now valued at 30 March.

Baker Steel Resources Trust (BSRT ) added 1.6% to 64p on a 22% discount after agreeing to sell its stake in Bilboes Gold to Caledonia Mining for 10% less than its carrying value, but believed the 1% royalty it retained could generate $2.6m for dividends to shareholders.