An extraordinary blame game erupted after the Bank of England was forced to hike interest rates to their highest level in almost 15 years – inflicting misery on mortgage holders facing spiralling costs.
The central bank governor Andrew Bailey was left fighting for his reputation, as senior Tories said he had serious “questions to answer” over the inflation crisis.
Rishi Sunak said the Tory government still supports the Bank’s role in trying to tame inflation – but No 10 repeatedly refused to say whether the prime minister thought Mr Bailey was doing a good job.
Mr Bailey hit back by lashing out at company bosses, blaming them for fuelling Britain’s inflation woes by offering “unsustainable” pay rises and chasing profits.
The war of words comes as:
- The Bank hiked the base rate to 5 per cent – and markets predicted it will hit 6 per cent this year
- Economists warned of recession ahead, with higher rates set to hit “like a giant wave”
- Jeremy Hunt ruled out direct mortgage support – but experts predicted reversal within weeks
- Sunak and Hunt appeared to accuse supermarkets of profiteering
- Foreign secretary James Cleverly was mocked by the BBC as he struggled to explain the inflation plan
Under pressure to tame frozen inflation, the Bank announced on Thursday that it would raise the base rate a full 0.5 per cent to 5 per cent – higher than analysts’ predictions of 4.75 per cent, and the 13th rise in a row.
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 income from soaring payments.
Speaking about his promise to halve inflation by the end of 2023 at an event in Kent, Mr Sunak said: “It’s clearly become more challenging and it’s clearly become harder – but it’s not impossible.” The PM said he was “totally 100 per cent on it”, adding: “It is going to be OK and we are going to get through this.”
Earlier, No 10 said Mr Bailey still had the support of the government – but Mr Sunak’s official spokesman refused to say if the PM believed that the governor had done a good job in tackling inflation.
Rishi Sunak said the government will ‘remain steadfast’ in battle to curb inflation— (PA Wire)
Blaming company bosses for persistent inflation, Mr Bailey told Sky News: “We cannot continue to have the current level of wage increase” – 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 added: “If we don’t raise rates now, it could be worse later.”
Mr Sunak and Mr Hunt also appeared to blame supermarkets for persistent inflation, suggesting they could be profiteering as they threatened a crackdown on prices.
Speaking in Kent, the PM said the government was “making sure they are behaving responsibly and fairly”. And in a letter to Mr Bailey, the chancellor said supermarket prices were “indicative of some rebuilding of profit margins”.
Mr Hunt said he was determined to make sure that “falls in input costs are passed onto consumers” and would be talking to regulators about what action could be taken.
It comes as furious Tory MPs turned on the Bank governor. 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 had been so behind the curve. “Too little too late is the reason inflation is now becoming sticky,” she said.
Andrew Bailey is under pressure from Tories who say he has been ‘asleep at the wheel’— (PA Wire)
Jacob Rees-Mogg told The Sun that Bank chiefs had “bungled” by being “entirely complacent” on inflation in recent years, while ex-chairman Jake Berry said they had been “asleep at the wheel”.
Andrew Sentance, a former member of the Bank’s Monetary Policy Committee (MPC), told The Independent that the Bank had made “lots 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.”
Sushil Wadhwani, a member of chancellor Jeremy Hunt’s Economic Advisory Council, told the BBC’s World at One said the Bank had been too “slow” to act on inflation, adding: “All of us can learn lessons from this sorry episode.”
Meanwhile, 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 the most vulnerable.
Chancellor Jeremy Hunt is refusing to offer direct support to mortgage payers— (PA Wire)
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.
A defiant Mr Hunt insisted the Treasury would “stick to its guns” – 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 the banks to ease the crisis on their own.
The economist predicted more targeted help for homeowners in the weeks ahead. He said it would most likely come from an expanded Support for Mortgage Interest (SMI) scheme – introduced in the aftermath of the 2008-09 banking crash.
“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.”
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, while Unite general secretary Sharon Graham accused Mr Bailey’s team of “inflicting pain on ordinary households”.
Mr Sunak appeared rule out tax cuts in the autumn – a blow to the Tory right demanding changes at the next Budget. “It might sound great, ‘Let’s cut your taxes over here, let’s spend some more money over there, let’s do massive pay awards for everyone in the public sector’.
“It might feel great for a day, for a week, for a month ... pretty quickly it would turn out to have been a really bad idea.”
Former cabinet minister John Redwood called for tax cuts, and attacked Bank chiefs for getting their 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 urged reform. “They should be asking themselves difficult questions on why Japan, China and others have 2 per cent or less inflation.”
Earlier on Thursday, foreign secretary James Cleverly was left red-faced in a bruising BBC interview when he was put on the spot over the inflation crisis.
Challenged six times to say how Mr Sunak planned to cut price rises, Mr Cleverly stumbled in his replies – and was at one point greeted with laughter by BBC Radio 4 Today interviewer Amol Rajan.
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 central 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.
