Keir Starmer has conceded he was disappointed in the UK growth figures last week, but denied that his government’s budget was responsible for a recent rise in mortgage rates.
The prime minister told journalists travelling to the G20 summit in Rio: “What we have done with the budget is to stabilise the economy and that, in my view, was the essential first step.
“As a result of that, the forecasts are for interest rates to go down, inflation to go down – you saw the figures around the budget,” he said, adding that mortgage rates were “individual decisions for the banks, but the interest rates will be coming down”.
A string of high street lenders have pushed up mortgage rates modestly in recent days amid expectations of higher inflation. Barclays has increased some fixed-rate deals by as much as 0.56 percentage points.
In the forecasts published alongside last month’s budget, the independent Office for Budget Responsibility (OBR) said it expected inflation to pick up to 2.6% in 2025, “partly due to the direct and indirect impact of budget measures”.
Economists say this higher forecast for inflation – resulting from stronger-than-expected government spending – has been one factor pushing up borrowing costs.
The chancellor, Rachel Reeves, used her budget to announce a £70bn increase in public spending, to fix crumbling public services and invest in infrastructure.
“It’s a big loosening, and that will come with faster growth, higher inflation and higher interest rates,” said James Smith, a research director at the Resolution Foundation, a thinktank.
The Bank of England is still expected to continue cutting interest rates from their current level of 4.75%, but at a slightly slower pace than experts were projecting before the budget.
The shadow chancellor, Mel Stride, attacked Starmer for denying responsibility for mortgage rates. “At the end of the day, his government’s choices will lead to interest rates staying higher for longer, punishing thousands of hard-working families with mortgages for years to come,” he said. “Labour’s desperate spin doesn’t change that reality.”
The moves in mortgage deals in recent days are dwarfed by the sharp jump in the wake of Liz Truss’s mini-budget, however.
When bond yields increased after Reeves’s budget, the chief secretary to the Treasury, Darren Jones, suggested the UK still had “PTSD from Liz Truss”.
Economists stress government policy is far from the only factor lifting mortgage rates, with uncertainty about the impact of Donald Trump’s policies also weighing on markets’ minds.
“Global rates have been going up – in the US, the UK and elsewhere as well,” Smith said. “It’s the Trump effect as much as anything. The budget reaction is smaller than that – but it pushes it in a similar direction.”
Echoing the chancellor’s response to last week’s GDP figures, which showed growth slowing to just 0.1% in the three months to September, the prime minister said it was “not good enough, they’re not satisfactory – I want to go further than that.”
He said: “That’s why we’re working so hard to get the investment we need into the country. But the first step is to stabilise the economy. Do I want better growth? Yes, I do. I don’t think that’s satisfactory and we will be making sure that figure improves.”
Some business groups have suggested the extended period of uncertainty between July’s general election and October’s tax-raising budget damaged confidence over the summer and contributed to the GDP slowdown.
The Bank of England governor, Andrew Bailey, will be questioned by MPs on the cross-party Treasury select committee on Tuesday and is expected to be asked about the impact of the budget on Bank policy.
Bailey caused a stir last week when he waded into the debate about the impact of Brexit, saying it was “weighing” on the UK economy and urging the government to strike up a closer relationship with the EU.
The outlook for the global economy has been clouded significantly by the election of Trump, who plans to impose tariffs – import taxes – on all foreign goods flowing into the US.
