Jeremy Hunt has said the UK has “no alternative” but to raise interest rates to bring down inflation, as households brace for the Bank of England to increase borrowing costs further next week.
The chancellor said the government would be “unstinting in its support” for the central bank to “do what it takes” to squeeze high inflation out of the system amid the cost of living crisis.
In its most aggressive round of interest rate rises in decades, the Bank has already increased borrowing costs from 0.1% in December 2021 to 4.5%, and financial markets expect another rise of at least a quarter-point at its next policy meeting on 22 June. Predictions suggest rates could peak above 5.5% before Christmas.
Growing numbers of households are coming under pressure from the higher cost of mortgages and loans, adding to the burden on their finances while inflation is at its highest rate since the early 1980s.
The Resolution Foundation thinktank forecasts that 1.6 million mortgage holders will come to the end of cheaper fixed-rate deals this year, adding about £2,300 to a typical borrower’s annual repayments.
Banks and building societies are continuing to pull home loans off the shelves and raise the cost of their fixed-rate mortgages, in a scramble by lenders to reprice their deals to take account of Britain’s higher interest rate prospects.
On Wednesday, days after it temporarily pulled down the shutters due to a surge in demand, HSBC announced that it would be raising the pricing on a swath of its residential and buy-to-let fixed deals with effect from Thursday.
Other lenders increasing rates included Coventry Building Society’s broker arm, which said it would be launching new, more expensive deals on Friday.
On Monday, Santander became the latest big bank to temporarily pull its mortgage deals for new borrowers from sale, and the following day, NatWest put up the rates on some of its deals by as much as 1.57 percentage points.
Hunt was asked on the BBC if he was following John Major’s dictum on tackling inflation from 1989 – “If it isn’t hurting, it isn’t working”. The chancellor said: “In the end, there is no alternative to bringing down inflation, if we want to see consumers spending, if we want to see businesses investing, if we want to see long-term growth and prosperity.
“We have to do everything we can as a government, as a country, to support the Bank of England in their mission to squeeze inflation out of the system.”
Major made his comment at a time when the Treasury was in charge of setting interest rates to manage inflation. Tony Blair’s administration handed that responsibility to the Bank in 1997 when it granted the central bank independence.
Rishi Sunak’s government is under mounting pressure over the blow to millions of households from higher borrowing costs. Almost a third of voters blamed the government for soaring mortgage costs after Liz Truss’ mini-budget last autumn, which triggered turmoil in financial markets, according to a YouGov poll from October.
The prime minister pledged in January to halve the UK’s annual inflation rate by the end of this year, but economists say his target is increasingly at risk because inflation remains persistently high.
UK government borrowing costs rose above the levels hit during Truss’s premiership on Tuesday, after stronger than expected jobs and pay figures reinforced expectations that the Bank would take action to curtail stubborn inflation.
Fresh figures on Wednesday showed that the UK economy managed a return to growth in April as rising car sales and customers spending in pubs and bars helped fuel a modest rise in national output.
The Office for National Statistics said gross domestic product rose by a slender 0.2% month on month, matching the forecasts of City economists for a recovery from March, when output declined by 0.3%.
A spokesperson for the Treasury said a stable economy was the best way to help reduce mortgage rates, “which is why we are dedicated to halving inflation, growing our economy and reducing debt”.
“We understand mortgage holders are worried about repayments, and the chancellor has been clear he expects banks to live up to their responsibilities and support any mortgage borrowers who are finding it tough right now – as set out in FCA guidance.”
