If the bosses of some of Britain’s biggest banks were nervous as they entered Downing Street for a crunch meeting on the mortgage crisis on Friday morning, they were quickly reassured.
Jeremy Hunt hosted six executives and one senior regulator after a week of economic bad news, which saw inflation remain steady at 8.7%, the Bank of England raise the base rate to 5% and lenders continue to increase the costs of mortgage deals.
But the chancellor was not there to read the riot act. Instead, he wanted to agree a voluntary “mortgage charter”, under which banks would offer borrowers greater flexibility over repayment terms and repossession proceedings. Banks also agreed not to mark down the credit scores of anyone who takes advantage of such flexibility.
“We agreed some very important things for people who are worried about their rates going up,” the chancellor said afterwards.
But others believe the government’s response has been limp. Rachel Reeves, the shadow chancellor, called Friday’s announcement “weak”.
However, the approach being taken by Hunt and the prime minister, Rishi Sunak, reflects the political reality they face. Having promised to halve inflation to about 5% by the end of the year, Sunak is now having to acknowledge that control over inflation lies largely with the Bank of England.
Nothing illustrated this tension better than Thursday’s awkward interview between the foreign secretary, James Cleverly, and the BBC’s Amol Rajan.
Four times Rajan asked what the prime minister’s plan to cut inflation was, only to be given a slightly different answer each time. After several stumbles, Cleverly admitted: “Not all the levers of control are in the government’s hands … the choice was made to have an independent Bank of England.”
Tim Pitt, a former Treasury adviser under Philip Hammond and Sajid Javid, and now a partner at Flint Global, said: “It is very, very difficult. If the government was to intervene in the mortgage market it would undermine the entire point of raising interest rates, which is to squeeze people’s income and get them to spend less.”
This week Karen Ward, an economic adviser to Hunt, went even further, saying the Bank would have to “create a recession” to get rid of persistently high inflation.
The government’s mortgage charter echoes some of the proposals put forward by Labour earlier in the week. Tory aides pointed out it would go further in one way, by agreeing that borrowers should not risk having their homes repossessed unless they are a year in arrears, rather than the six months proposed by Labour.
Shadow ministers, however, say their approach is fundamentally different because they want such changes to be enforced on the entire mortgage lending sector, rather than bringing about change through piecemeal agreements with certain banks.
And it is not just Labour that wants the government to go further in its support for mortgage holders.
On Tuesday, two prominent Tory MPs from the “red wall” of northern seats called for the government to introduce tax relief on mortgage interest repayments – something scrapped by Gordon Brown when he was chancellor in 2000.
During a Commons debate on Tuesday, Jake Berry, the MP for Rossendale and Darwen, said this would be “a true Conservative way of tackling the cost of living crisis by cutting taxes and putting money back in the pockets of the squeezed middle”.
Others say the best answer is to do exactly the opposite and raise taxes. Part of the problem with the Bank of England’s rate rises is they only affect mortgage holders who are not on fixed-rate plans. Those hit hardest are the heaviest borrowers, who tend to be younger and have lower incomes.
If the government wants to curtail the spending of older, richer people, it needs to tax them, say some. David Gauke, a former Conservative Treasury minister, said: “Ministers could consider taking measures such as increasing taxes to redistribute the pain. The challenge all authorities have at the moment is about the distribution of pain, but the pain can’t be avoided when the economy is running too hot.”
Amid the political wrangling, many experts and politicians are focusing their anger on the Bank of England. Several Conservative backbenchers have criticised Andrew Bailey, its governor, for being too slow to raise rates at first and now overcorrecting with the latest action. John Baron called Bailey “asleep at the wheel”, while his fellow Conservative backbencher Christopher Chope asked: “What credibility has he got?”
Some economists on the right agree. Gerard Lyons, chief economist at NetWealth, said: “My feeling is that if they had handled things well in recent months then it might have been possible to do what the Americans did last week, which is pause [interest rate rises]. But they weren’t able to do that because they didn’t have any credibility.”
Andrew Lilico, the executive director of Europe economics, said: “The Bank has failed so badly that Sunak should be removing its independence and taking it back in house. There have to be consequences for failing so utterly.”
Many in the Conservative party are looking ahead to what experts are calling the “mortgage timebomb” – a rolling effect as borrowers move off fixed-rate plans over the coming months and face higher rates for the first time – and wondering what it means for the election. Some even think it might persuade Sunak to bring forward his plans for the next election from next autumn, when the prime minister hoped to have the economy on the right track, to next spring, before the full pain of rate rises is felt.
“One thing that is in the prime minister’s control is the date of the next election,” said one Conservative aide. “If he can’t do much about inflation, he can do something about that.”
Many believe, however, that Sunak’s original sin was to have promised anything on inflation at all.
“There was always an extent to which it was a hostage to fortune to make a claim when the levers didn’t really lie in his hands,” said Gauke. “There is a lesson to be learned here: if the government wants to avoid the blame for higher inflation, it can’t try to take the credit when it falls.”
