Rishi Sunak has admitted his promise to halve inflation by the end of the year has “become harder” to deliver, as the government comes huge pressure over Britain’s juddering economy.
The prime minister said he was still “confident” he could meet the target of halving inflation by the end of 2023, after the Bank of England was forced to hike interest rates 0.5 per cent to 5 per cent.
Economists warned that Britain was now on course for recession – predicting the bigger-than-expected rise by the Bank would hit the economy “like a giant wave”.
Facing accusations from senior Tories that he has been “asleep at the wheel” over inflation, Bank governor Andrew Bailey lashed out company bosses – blaming them for fuelling inflation by offering “unsustainable” pay rises.
Mr Bailey insisted: “We cannot continue to have the current level of wage increase” – before warning firms against “seeking to rebuild profit margins” by putting up prices.
The governor acknowledged that the mortgage payment pain ahead would be “hard” but that inflation is “still too high and we’ve got to deal with it … if we don’t raise rates now, it could be worse later.”
Financial markets are now predicting that interest rates will strike a high of 6 per cent by the end of the year – amid warnings that 1.4 million mortgage holders will lose at least a fifth of their disposable from soaring payments.
Mr Sunak promised to halve inflation by the end of 2023 as one of his five big pledges. The PM made the pledge when inflation was 10.7 per cent, but price rises have come down more slowly than expected. Wednesday’s shock figures showed inflation frozen at 8.7 per cent.
Asked about his promise, Mr Sunak said: “It’s clearly become more challenging and it’s clearly become harder – but it’s not impossible and we’re throwing absolutely everything at it.”
Speaking at an event in Kent, Mr Sunak said he was “totally 100% on it”, adding: “It is going to be OK and we are going to get through this.”
Sunak said the government will ‘remain steadfast’ in battle to curb inflation
(PA Wire)
Senior Tory MPs have turned on the Bank governor. Jacob Rees-Mogg said the central bank had “bungled” by being “entirely complacent” on inflation in recent years, while ex-chairman Jake Berry said Mr Bailey had been “asleep at the wheel”.
Ex-Treasury minister Andrea Leadsom told The Independent that today’s rate hike was “essential” – but said there were “lots of questions” about why Mr Bailey and the Bank had been so behind the curve. “Too little too late is the reason inflation is now becoming sticky,” she said.
Andrew Sentance, former member of the Bank’s Monetary Policy Committee (MPC), also told The Independent that the Bank had been a “lot of errors” in failing to raise interest rates in recent years – arguing that they were “six to nine months behind the curve” on dealing with inflation in 2021 and 2022.
Mr Sentance said Mr Bailey was “not a master communicator”, but added: “I don’t think you improve things by firing the governor or any of his henchman … We need to make sure we have people with the right experience coming to the committee.”
Mr Hunt wrote to Mr Bailey to reassuring the governor that the Bank had his “full support”. No 10 said Mr Bailey still had the support of Mr Sunak – but the PM’s refused to say the governor and the Bank had done a good job in tackling inflation.
Andrew Bailey under pressure from Tories who say he has been ‘asleep at the wheel’
(PA Wire)
Dr Luciano Rispoli, senior economics lecturer at the University of Surrey, said the 0.5 per cent interest rate hike would “hit us like a giant wave – ultimately plunging the UK economy into a recession.”
Laura Suter, head of personal finance at AJ Bell, said the mortgage market would now be “a horror show” for those with fixed-rate deals coming to an end – with around 800,000 homeowners having to re-mortgage before the end of 2023.
Labour accused Mr Sunak and Mr Hunt of “burying their heads in the sand” on the mortgage pain ahead – urging the government to force the banks to provide more support to those struggling the most.
But shadow chancellor Rachel Reeves has ruled out Labour backing subsidies or direct financial support for mortgage holders. “A big fiscal injection of cash into the economy, especially an untargeted injection, would not be the right approach,” she told BBC Radio 4’s Today programme.
Lib Dem leader Ed Davey said homeowners were being treated as “collateral damage” by Mr Sunak and Mr Hunt after they refused the party’s call for a £3bn mortgage protection fund.
Chancellor Jeremy Hunt refusing to offer direct support to mortgage payers
(PA Wire)
A defiant chancellor Hunt insisted the Treasury would “stick to its gun” – insisting that any direct mortgage support from government would be “self-defeating” because it would mean “inflation stays higher for longer”.
Mr Hunt is set to meet with big lenders on Friday to urge them to offer more support. But Torsten Bell, head of the Resolution Foundation said the government “won’t get away with calling on other people to do things” in the weeks ahead.
The economist predicted more targeted help for homeowners in distress. He said it would most likely come in a revived and expanded Support for Mortgage Interest (SMI) scheme – introduced in the aftermath of the 2008-09 banking crash.
Sunak crack jokes as he reacts to interest rates hitting 15-year high
“This provides a loan to help cover mortgage interest payments that a homeowner can’t afford, with that loan repaid when you sell the property,” said Mr Bell – adding: “Politicians should be doing more than calling in bankers for meetings.”
The unions condemned the Bank’s decision to hike the rate by 0.5 per cent. TUC general secretary Paul Nowak warned that “dangerous groupthink” would cost homes. Unite general secretary Sharon Graham said the Bank had made the “wrong choice”, accusing it of “inflicting pain on ordinary households”.
Former cabinet minister John Redwood attacked Mr Bailey and Bank of England chiefs for getting its forecasts wrong – arguing they made a “big mistake” by buying up too many bonds “which created the inflation”.
Mr Redwood told The Independent that Mr Bailey’s position was still “secure” but called for major reform. “Their model has to be changed, the sooner the better. They should be asking themselves difficult questions on why inflation in Japan, China and other have 2 per cent or less inflation.”
The Bank of England’s MPC said it expects inflation to “fall significantly further during the course of the year”, but the markets expect the Bank will raise interest rates yet again in the first week of August.
The Bank noted that markets now expect the base rate to stand at an average of 5.5 per cent for three years. Seven members of the nine-person MPC opted for the increase to 5 per cent, but two members called for rates to remain flat.