The Governor of the Bank of England has warned that interest rates may have to be raised even higher than initially expected to tackle inflation. Andrew Bailey said Bank officials will “not hesitate” to raise interest rates if necessary, while warning that a “stronger” response than previously anticipated could be required.
Public comments by Mr Bailey have taken on increased significance in recent weeks, after the government’s mini-budget spooked the markets, sent the pound plummeting and forced the independent Bank of England to intervene in a bid to restore financial stability. It comes as the governor revealed that he spoke to new chancellor Jeremy Hunt on Friday and had an “immediate meeting of minds”.
Mr Hunt has been given the task of rethinking the government's approach to growing the economy after former chancellor Kwasi Kwarteng’s tax-cutting budget triggered market turmoil, eventually resulting in him being sacked by Liz Truss. It will now be up to the new chancellor to deliver the government’s fiscal plan at the end of the month.
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In a short speech in Washington this afternoon, Mr Bailey acknowledged what he called the “violent moves” in the UK markets as he signalled that interest rate could be in line to increase again, after the Bank’s Monetary Policy Committee (MPC) raised rates by 0.5 percentage points to 2.25 per cent in September.
Speaking at the G30 annual international banking seminar, Mr Bailey said: “The UK Government has made a number of fiscal announcements and has set October 31 as the date for a further fiscal statement.” He said that the Bank’s monetary policy committee “will respond to all this news at its next meeting in just under three weeks from now”.
Mr Bailey added: “This is the correct sequence, in my view. We will know the full scope of fiscal policy by then but I will repeat what I have said already: We will not hesitate to raise interest rates to meet the inflation target. And, as things stand today, my best guess is that inflationary pressures will require a stronger response than we perhaps thought in August.”
Taking questions after his address, Mr Bailey said: “I can tell you that I spoke to Jeremy Hunt, the new Chancellor, yesterday. I can tell you that there was a very clear and immediate meeting of minds between us about the importance of fiscal sustainability and the importance of taking measures to do that.”
He continued: “It’s not appropriate for me to constrain the choices he makes, but the very clear message I would give, and it is a clear message for everybody, including a clear message for markets… I can tell you there is a very clear and immediate meeting of minds on the importance of stability and sustainability.”
It comes as a think tank warned that more than five million households are predicted to see their annual mortgage payments rise by an average of £5,100 between now and the end of 2024. The Resolution Foundation said that around £1,200 of the average predicted increase reflects higher expectations of interest rate rises since the mini-budget.
The number of mortgages on the market nosedived at the end of September, before lenders gradually started to bring back new deals but with higher rates. On Friday, Moneyfacts.co.uk counted 3,112 mortgage products available, compared with 3,961 on the day of the mini-budget.
The average two and five-year fixed mortgage rates on the market are at their highest levels since 2008, standing at 6.47 per cent and 6.29 per cent respectively. The think tank emphasised that its mortgage cost estimates are “very sensitive to fiscal, as well as monetary, policy developments in the months and years ahead”.
While some homeowners on variable rate deals will see their costs increase immediately with higher interest rates, the impact on the majority of mortgaged homeowners, who are on fixed-rate mortgages, will build over the coming years as they move off lower rates on to new deals. By the end of 2024, 5.1 million mortgaged households – or nearly a fifth of households across Britain – will be spending more on their housing costs as a result of increases in mortgage rates since the third quarter of 2022, according to the foundation's research.
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