The Bank of England has unexpectedly pushed up interest rates to 5%, the highest rate in almost 15 years, as policymakers and the UK Government come under mounting pressure to control the cost-of-living crisis.
The move is set to deepen the mortgage crisis as borrowing costs are hiked up for the 13th time in a row.
The 0.5 percentage point increase was the sharpest increase since February, surprising economists who had been expecting a smaller hike of 0.25 percentage points.
It follows a higher-than-expected inflation reading in May as continued price rises forced policymakers into action in a bid to bring inflation down to the 2% target.It is the 13th time in a row interest rates have risen, with calls mounting for the Government to do more to help amid a deepening mortgage crisis.
Wednesday’s shock inflation figures showed the Consumer Prices Index remained unchanged at 8.7% in May against hopes for a sharp fall. With the Government and Bank of England under rising pressure over their failure to rein in inflation, Prime Minister Rishi Sunak insists he feels a “deep moral responsibility” to deliver on his pledge to halve inflation by the end of the year.
Chancellor Jeremy Hunt has also said the Government will “stick to its guns” and urged patience for the Bank’s rate rises to curb inflation. But as inflation remains stubbornly high, there are fears this may be increasingly out of reach and the finger of blame is pointing at the Government and Bank for failing to get the cost of living crisis under control.
Rishi Sunak, due to speak after the rates announcement on Thursday at an economy-focused PM Connect event in the south-east of England, will tell business figures that halving inflation is his administration’s “number one priority” and that he wants to “get back” to the target of inflation being at 2%, less than a quarter of what it stood at last month.
In pre-briefed comments, Mr Sunak is expected to say: “I feel a deep moral responsibility to make sure the money you earn holds its value.
“That’s why our number one priority is to halve inflation this year and get back to the target of 2%.”
The Bank is tasked with keeping inflation as close to 2% as it can, and the best tool it has to do that when inflation is high is by raising the base interest rate.
But a further rise is likely to pile more pressure on mortgage-holders as rates are already at close to 15-year highs.
Mr Hunt has so far dismissed suggestions that ministers could intervene to assist homeowners with rising mortgage rates, though he is set to meet with lenders on Friday as pleas grow for more to be done.
He said he has spoken to consumer champion Martin Lewis, who on Tuesday said that a mortgage ticking time bomb is now “exploding” and that his previous warnings failed to be heeded.
It comes as the average two-year fixed residential mortgage rate has surpassed 6%, according to data from Moneyfactscompare.co.uk.
Moreover, expectations of where rates will peak have surged in recent weeks, with markets now anticipating a high of 6% by early next year and warnings that 1.4 million mortgage holders will lose at least a fifth of their disposable income in additional repayments.
Ministers appeared unable to give assurances to worried mortgage holders, with Transport Secretary Mark Harper saying there would be “no quick fix” to the current economic situation.
Mr Harper said the Government continued to have confidence in Bank governor Andrew Bailey, though there were reports that Mr Hunt’s economic advisers have rounded on the Bank for failing to curb inflation.
James Cleverly, during an appearance on BBC Radio 4’s Today programme, struggled to set out what short-term measures the Prime Minister was taking to halve inflation.
Asked repeatedly for specific actions being taken by the Government, he said: “One of the main vehicles for short-term addressing inflation is interest rates.”
