Chancellor Jeremy Hunt on Friday backed the Bank of England hiking interest rates further — even if it tips Britain into recession — if needed to force down high inflation.
Mr Hunt made the startling admission amid fears that the bank’s Monetary Policy Committee may have to raise interest rates from 4.5 per cent to as high as 5.5 per cent to properly grip inflation and stabilise the economy. Such a hike would pile further misery on millions of homeowners who would see their mortgage bills spiral even higher.
But asked by Sky News if he was “comfortable” with the Bank of England doing whatever it takes to bring down inflation, even if that potentially would trigger a recession, he said: “Yes, because in the end, inflation is a source of instability. And if we want to have prosperity, to grow the economy, to reduce the risk of recession, we have to support the Bank of England in the difficult decisions that they take.”
His comments were broadcast shortly after it emerged that Britain’s biggest building society, the Nationwide, is increasing some of its mortgage rates, by up to 0.45 per cent, from today, saying that this will ensure its rates “remain sustainable” in the current economic environment.
Inflation fell from 10.1 per cent in March to 8.7 per cent in April, but this was still higher than the City’s expectation of around 8.3 per cent.
Core inflation, which excludes energy, food, alcohol and tobacco, was 6.8 per cent, up from 6.2 per cent in March, and the highest rate since March 1992.
The Monetary Policy Committee closely watches core inflation when setting interest rates. Food price inflation also remained near a 45-year high, at just above 19 per cent.
After the inflation figures on Wednesday, swap rates, which are used by lenders to price mortgages, have been rising and some have also been tweaking their mortgage rates upwards, amid expectations of higher interest rates.
Economist Mohamed A El-Erian, president of Queens’ College, Cambridge and chief economic adviser at Allianz, told BBC Radio 4’s Today programme: “I don’t think the Bank of England has any choice but to increase interest rates further. It could well take interest rates from about 4.5 per cent all the way to 5.5 per cent — that is what the market is anticipating.
“But unless the Government steps up its efforts to increase productivity, and improve supply chains and labour market functioning, we will end up in a situation where the Bank of England actually pushes us into recession.”
On Mr Hunt’s recession remark, former Tory chancellor Lord Lamont told Sky News: “We have not had inflation at this level for a long time. I think people have forgotten the dangers,” as he warned of its impact on living standards and fuelling “industrial chaos” with the wave of strikes blighting Britain.
Shadow Treasury minister James Murray said: “It’s no surprise the Chancellor doesn’t seem to care about growing the economy. After 13 years of the Tories we are trapped in a low growth, high tax cycle.
“Never have people paid so much and got so little in return.”
Many homeowners have been on mortgage rates of around 1.5 per cent and already face increases of £500 to £600 in their monthly payments when they come off their current deals, before any further possible rate rises above 4.5 per cent kick in. Renters will also feel the impact as landlords increase rents as their mortgages on properties go up.
Rishi Sunak pledged to halve inflation this year, making the promise in January when the figure stood at 10.1 per cent. There are growing questions over whether he will achieve this.
Higher than expected price rises also make it more difficult for the Chancellor to justify pre-election tax cuts as they would be inflationary. They also increase the interest bill on government borrowing, hitting funding for public services.
Financial information website Moneyfacts said that it had seen some mortgage product withdrawals as well as rate increases this week. According to its figures, the average two-year fixed-rate mortgage on the market is 5.34 per cent and the average five-year fix is 5.01 per cent. At the start of April, these figures were 5.35 per cent and 5.05 per cent respectively.
