Households are facing ‘difficult times,’ according to a Cabinet official, as inflation increases and interest rate hikes drive up mortgage prices.
Michael Gove also cautioned that the government would not be able to assist everyone who will be affected by the next “painful correction.”
The Bank of England will raise interest rates even higher as a result of the cost-of-living crisis, forcing politicians to cut back on expenditure, he added.
The announcement came as the Bank raised interest rates for the sixth time in a row, to a 13-year high of 1.25 percent, and forecasted inflation of 11% this fall.
Mr Gove, the Levelling Up Secretary, appeared to push the Bank of England to raise interest rates even higher, claiming that it needed to’squeeze out the inflationary forces.’
Experts predict that by the end of next year, borrowing rates will have risen to 3.5 percent, putting even greater strain on consumers. Inflation should be slowed by raising interest rates, which encourages families and corporations to save rather than consume.
However, this would raise loan costs, harming mortgage holders and other borrowers, including the government, which is saddled with a £2 trillion debt mountain.
Two million homeowners with variable-rate mortgages and 1.3 million borrowers with fixed-rate mortgages will see big increases at the end of the year.
‘Someone who locked in record low mortgage rates in previous years would suffer a significant financial shock if they tried to refinance that debt today,’ said Laura Suter, a personal finance specialist at investment company A J Bell.
On a particularly bleak economic day:
Experts believe the pound will remain weak as the Bank is caught on the back foot in its fight against increasing costs. The cost of putting food on the table for a family of four is projected to climb by more than £500 a year, according to the Bank of England.
Mr Gove cautioned that when borrowing costs increased, the government would have to cut back on expenditure.
‘When it comes to squeezing inflation out of the system, you have to rely on the Bank of England and the government to have fiscal and monetary policies that will unavoidably prevent us from doing all we would like to do in perfect conditions.’
‘It’s an inescapable result of the central bank policies that the UK and others have been forced to pursue.’ The UK and the global economy will undoubtedly face difficult times in the future.’
‘It has meant that a correction needs to occur, and that is unpleasant,’ he said, referring to the low interest rates that have been in place since the 2008 financial crisis, when they were reduced to promote spending.
The Bank of England’s monetary policy committee (MPC) indicated yesterday that if cost-of-living increases get out of hand, it is prepared to ‘act decisively.’
However, it only raised the base rate by 0.25 percentage points, to 1.25 percent, which was less than the 0.5 percentage point rise that many had anticipated.
The Bank is debating whether to take robust action against the cost-of-living crisis at the price of economic development.
Higher rates may help to control inflation, but they may also slow the UK’s recovery from the Covid epidemic.