Poverty campaigners have warned of a “prolonged period of pain” after the Bank of England said Britain is facing the longest recession since records began, stretching deep into 2024.
The Bank raised interest rates by 0.75 per cent to 3 per cent on Thursday, leaving homeowners with the biggest single shock to their mortgage bills in more than three decades.
Money Saving Expert founder Martin Lewis said mortgage-holders on variable rates face an additional £480 a year for every £100,000 of their loan.
And further increases implied by the Bank’s economic outlook mean that around 5 million households could be paying an average of £3,900 more on their mortgage bills by the end of 2024, according to calculations by the Resolution Foundation think tank.
But the financial woe will stretch far beyond homeowners, with renters facing escalating housing costs as landlords seek to cover their own mortgages, and the poor seeing the value of their income eroded by inflation at over 10 per cent.
Chancellor Jeremy Hunt signalled that there is more pain to come in his 17 November autumn statement, when he said there will be “difficult decisions” to be made on both tax rises and public spending cuts.
Mr Hunt tried to blame the UK’s parlous financial position on events beyond the government’s control, such as the Covid pandemic and the war in Ukraine.
But Sir Keir Starmer said voters were facing “a Tory premium on mortgages” because 12 years of austerity and sluggish growth had left the UK more exposed than other countries to global challenges.
“This, I’m afraid, lies at the door of Downing Street,” said the Labour leader.
The TUC renewed its calls for an immediate general election so that prime minister Rishi Sunak can seek a mandate for the austerity package he is expected to unleash later this month.
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And business organisation the CBI issued a plea to Mr Hunt to “learn the lessons” of the early 2010s, when chancellor George Osborne undermined growth by hacking back the government’s programme of capital spending.
The 75 basis point hike in the base rate was the eighth increase in succession by the Bank’s Monetary Policy Committee (MPC) from a historic low of 0.1 per cent less than a year ago, and represented the largest single upward leap since 1989.
Bank governor Andrew Bailey said that “the road ahead will be a tough one” as he set out a forecast predicting the longest period of uninterrupted decline that the nation has experienced for around a century. The UK could face eight consecutive quarters of negative growth if current market expectations are proven, stretching all the way through 2023 and into the expected election year of 2024, he said.
But Mr Bailey had some words of hope for homeowners, stating that he expected future rises to be lower than currently priced in by the financial markets, meaning that rates on new fixed-term mortgages “should not need to rise as they have done”.
The Resolution Foundation, an organisation focused on improving living standards, said that 1.2 million households on variable rate mortgages can expect increased housing costs in the near future as a result of Thursday’s hike. But they will be joined by another 400,000 to 500,000 new households coming off fixed-rate deals each quarter, bringing the total facing higher monthly bills to around 5.1 million by the end of 2024.
Bank of England governor Andrew Bailey said interest rate rises were needed to rein in inflation
Describing the hike as “historic in its sheer scale”, the think tank’s research director James Smith said: “The Bank also made clear that the cost of living crisis is set to get far deeper, and not just for those with a mortgage. Everyone will be affected by prolonged double-digit inflation, but poorer households will be hit hardest by the surge in food prices and energy bills.”
Figures released by the Bank indicate that the average household will see its real income fall by around £800 next year, after inflation is taken into account.
Rebecca McDonald, chief economist at anti-poverty organisation the Joseph Rowntree Foundation, said the anxiety aroused by the MPC statement made it “crucial” for Mr Hunt to deliver an inflation-matching rise in welfare benefits in his 17 November statement.
The rise, promised by Mr Sunak when he was chancellor earlier this year, should be brought forward from April to provide instant relief, she said.
Warning of “an anxious winter followed by extremely lean years for many on low or even middle incomes”, Ms McDonald said the Bank’s projections “point to a prolonged period of pain with little hint of relief”. “It’s very difficult for those on the lowest incomes to plan how they will get through this, but the government can give some certainty by uprating benefits in line with inflation,” she said.
A survey for the Unite union, carried out hours before the Bank’s announcement, found that just over half of respondents reported difficulty paying household bills, a third said they had taken on debt to put food on the table, and one in seven admitted being in food poverty.
The general secretary of Unite, Sharon Graham, said many workers are facing “unsurmountable financial pressure”, adding that the interest rate hike “will shackle those workers with more debt while corporate profiteering runs rampant”.
Prime minister Rishi Sunak with chancellor Jeremy Hunt
At 0.75 per cent, Thursday’s rate hike was lower than the full-percentage-point rise markets had been predicting until recently, in line with lower-than-expected increases in other countries including Canada.
The MPC split by seven votes to two on the scale of the rise, with one member preferring a gentler uptick of 0.5 percentage points and another favouring 0.25.
Mr Bailey acknowledged that eight rate rises since last December amounted to “big changes, and they have a real impact on people’s lives”. But he warned: “If we do not act forcefully now, it will be worse later on.”
Mr Hunt said: “Inflation is the enemy and is weighing heavily on families, pensioners and businesses across the country. That is why this government’s No 1 priority is to grip inflation, and today the Bank has taken action in line with their objective to return inflation to target.
“Interest rates are rising across the world as countries manage rising prices largely driven by the Covid-19 pandemic and Putin’s invasion of Ukraine.”
But Sir Keir told Times Radio: ”There’s other stuff going on in the world, but that’s only part of the story. We’re more exposed in this country – we’re paying a higher price in this country – because of the failure over the last 12 years.
“We’ve got weak foundations to our economy, we haven’t had anything like the growth that we’ve needed, therefore we’re more exposed. So it is not right for the government to simply suggest this is all external factors. This, I’m afraid, lies at the door of Downing Street.”
The TUC’s head of economics, Kate Bell, said: “Workers are paying a high price for the Conservatives crashing the economy. We need a new economic plan with growing wages and strong public services at its heart. And we need a general election now, to replace the party that created this crisis.”
Liberal Democrat leader Sir Ed Davey described the Bank’s recession prediction as “a badge of shame for Rishi Sunak and this Conservative government”.
“Months of chaos and incompetence have played havoc with our economy, and people are suffering as a result,” said Sir Ed. “It’s time for a proper windfall tax on oil and gas companies, and for benefits and pensions to be uprated in line with inflation.”
