Homeowners warned of ‘significant’ rise in UK
interest rates
Bank of England’s chief economist speaks out after
mini-budget, with financial markets expecting rates to reach up to 6%
Larry
Elliott, Zoe Wood and Rowena Mason
Tue 27 Sep
2022 19.14 BST
Britain’s
homeowners have been warned to brace themselves for a “significant” increase in
interest rates from the Bank of England in response to Kwasi Kwarteng’s
tax-cutting mini-budget last week.
Huw Pill,
Threadneedle Street’s chief economist, added to the concerns of millions of
mortgage payers who have already seen hundreds of home loan products pulled by
lenders in anticipation of a big increase in the cost of borrowing.
With the
financial markets signalling that the Bank might need to raise interest rates
as high as 6%, Santander, HSBC and Nationwide were among the big lenders
indicating that the end of cheap mortgages was coming to an end.
Roughly one
in 10 deals have disappeared this week according to the online mortgage
platform Dashly. On Monday there were 7,490 residential and buy-to-let mortgage
products available but by Tuesday evening there were 6,609, a drop of nearly
12%.
The Bank of
Ireland, Clydesdale Bank, Post Office Money and a slew of building societies
including Monmouthshire, Furness and Darlington were among those withdrawing
products.
Pill sought
to play down the possibility of an emergency rate hike from the Bank before the
next scheduled meeting of its nine-strong monetary policy committee in early
November.
But he made
it clear a sizeable increase in official interest rates from their current
2.25% was in prospect – a move that will affect borrowers on floating-rate mortgages
and those whose fixed-rate deals are ending.
“In my
view, a combination of the fiscal announcements we have seen will act as a
stimulus to demand in the economy,” Pill said of the mini-budget. “It is hard
not to draw the conclusion that this will require a significant monetary policy
response.”
The pound
again struggled in late trading, falling below $1.07 against the US dollar amid
reports that Kwarteng had to persuade a reluctant Liz Truss of the need to put
out a Treasury statement on Monday intended to counter the mayhem in the
market.
As well as
affecting sterling, the fallout from the mini-budget continued to reverberate
through other financial markets, with sharp increases in the interest rates
paid by the government on its debts.
The cost of
borrowing for five years was more expensive for the UK than for either Greece
or Italy. In another sign of the perceived riskiness of holding UK assets, the
interest rate on 10-year government bonds hit 4.5%, double the rate paid by
Germany.
The gap
between UK and German bonds was the largest since 1991, while the surge in UK
10-year borrowing costs in recent days was estimated to be the biggest shift in
gilt yields since 1976, when a run on the pound resulted in a rescue package
from the International Monetary Fund.
Pill said
the Bank was not “indifferent” to recent moves in UK asset prices. In addition
to the fall in the pound and the rise in bond yields, the FTSE 250 index of
shares in middle-ranking UK companies closed last night at its lowest level in
almost two years.
Christian
Lindner, Germany’s finance minister, joined the lengthening list of
policymakers and economists expressing doubts about the Truss government’s
attempt to stimulate growth at the same time as the Bank of England was raising
interest rates.
“In the UK,
a major experiment is starting as the state simultaneously puts its foot on the
gas while the central bank steps on the brakes,” Lindner said.
Larry
Summers, a former US Treasury secretary, warned that sterling’s respite might
be short-lived and that the UK government’s “utterly irresponsible” plans could
drag the pound below parity against the euro, as well as the dollar.
“The first
step in regaining credibility is not saying incredible things. I was surprised
when the new chancellor spoke over the weekend of the need for even more tax
cuts. I cannot see how the Bank of England, knowing the government’s plans,
decided to move so timidly.”
Virgin
Atlantic urged the government to consider “reversing course” after the
mini-budget, with the weaker pound massively driving up costs for airlines.
Shai Weiss,
its chief executive, said the economic situation was “hurting consumers” and
the airline was deeply concerned, even though it believed its own bookings
would hold up.
Kwarteng
rejected any suggestion that he might rethink last week’s package, insisting in
a meeting with representatives of UK banks that he was right to announce £45bn
of tax cuts, which included the reversal of April’s increase in national
insurance contributions, a drop in the basic rate of income tax from 20% to 19%
and the scrapping of the 45% rate paid by those earning more than £150,000 a
year.
“We have
responded in the immediate term with expansionary fiscal stance on energy
because we had to. With two exogenous shocks – Covid-19 and Ukraine – we had to
intervene. Our 70-year-high tax burden was also unsustainable,” the chancellor
told bankers.
“I’m
confident that with our growth plan and the upcoming medium-term fiscal plan –
with close cooperation with the Bank our approach will work.”
Downing
Street rebuffed talk of a split between No 10 and No 11 over how to deal with
market reaction to the mini-budget, and denied that there was a row.
However,
Whitehall sources said there was talk within the civil service of an argument between
the prime minister and chancellor at the meeting on Monday morning.
Sky News
said Truss had been resisting Kwarteng’s suggestion that a Treasury statement
was needed to calm the markets.
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