On Thursday we saw the Bank of England raise interest rates to 5% to their highest level since April 2008, with some economists suggesting that they could go even higher over the next few months.
This follows the previous day’s announcement which saw the fall in inflation stalling despite the expectation that the impact of higher food and fuel prices had now diminished and, as a result, inflation would reduce quickly. That could still happen but with core inflation remaining high, there are concerns that inflation is becoming embedded into the economy.
Not surprisingly, the Bank of England has followed orthodoxy in raising interest rates to reduce spending namely that if people spend less because of the higher cost of borrowing due to higher interest rates, the inflation will fall.
Yet there are worries that this crude tool may not be having the effect expected, especially given the strength of the labour market with exceptionally low unemployment, high job vacancy rates and elevated wage settlements, especially in the private sector where businesses are struggling to find the right people.
In addition, existing employees are demanding higher salaries to deal with the increased cost of living and therefore there seems to be little ‘pain’ in the system to reduce inflation.
The one exception is mortgage rates which, after the Bank of England’s decision, are likely to go up again for people looking to re-mortgage, and for homeowners on variable rates.
In fact, a recent paper from the Resolution Foundation have estimated that total annual mortgage repayments are now on course to rise by £15.8bn by 2026, and by £2,900 for the average household re-mortgaging next year.
Given that lenders have been withdrawing products from the market, if you can get a mortgage deal, then a typical rate for a two-year fixed mortgage deal prior to the latest increase in interest rates was 6.15% when it was 1% in 2020.
It can be easy to blame those who have taken out these loans to buy their homes, but it must be remembered that the Governor of the Bank of England himself stated that once the disruptions caused by Covid and the war in Ukraine had been dealt with, then lower rates would return.
Given such a situation and the promise from the UK Government that inflation (and by proxy, interest rates) would reduce over the next eighteen months, then you can easily why people would have taken out home mortgages.
As the Bank of England has been independent since 1997, there can be no direct political interference in its decision making despite its target of keeping inflation to 2% or less. However, that is not to say the UK Government cannot do anything to deal with this growing crisis.
Indeed, I was surprised when Jeremy Hunt, who has been an excellent Chancellor since his appointment last September, said that he is powerless to help and that interest rate rises are the only way to deal with this situation.
Yes, it would be potentially unwise to introduce any direct financial support to mortgage holders at this stage but that does not mean that he cannot encourage those holding those mortgages to come up with solutions that can ease the pain on those facing large increases in repayments.
If, as the UK Government has promised, inflation is only a temporary blip then why not provide a temporary solution until inflation (and interest rates) fall sufficiently over the next 12-18 months.
For example, they could offer fixed term holidays on repayments on mortgages over this period of uncertainty or offer a move to interest only mortgages to reduce the current burden on mortgage holders.
Certainly, doing nothing is not an option both economically or morally and given that it was UK taxpayers that bailed out the banks during the financial crisis of 2008, the time has come for banks to repay that debt by supporting the economy, and homeowners, through providing all the help they can at this difficult time.
It is the least they can do given, as one former Chancellor famously said, that we are in this together.
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