The Bank of England is set to push ahead with another bumper interest rate hike today amid warnings about the soaring cost of servicing Britain’s national debt.
The Bank is likely to increase the base rate by at least 0.5 percentage points, or even 0.75 percentage points, as it battles to get inflation under control.
The move, which will make borrowing more expensive for the Government, comes as Chancellor Kwasi Kwarteng prepares to spend hundreds of billions of pounds on energy bills and tax cuts in his mini-Budget tomorrow.
It led to gloomy warnings by the independent think-tank the Institute for Fiscal Studies that the combination of spending and tax cuts is ‘a gamble on growth that may not pay off’.
The Bank is likely to increase the base rate by at least 0.5 percentage points, or even 0.75 percentage points, as it battles to get inflation under control
The surge in the cost of living has wreaked havoc with public finances. The interest bill on the UK’s £2.4trillion debt mountain hit £8.2billion last month, the highest figure for August since records began in 1997, according to the Office for National Statistics.
Mr Kwarteng’s expensive plans – not yet analysed by the Office for Budget Responsibility which usually produces a forecast to show how spending plans will affect the public purse – have rattled some economists.
Under the spending plans, the UK will borrow £231billion – more than double the £99billion officially predicted in March, the IFS estimated. It will still be borrowing £100billion a year by the mid-2020s, more than £60billion higher than previously forecast, the think-tank added.
Higher growth could offset this but it would be hard to achieve, it said. Carl Emmerson, deputy director of the IFS, said: ‘While we would get to enjoy lower taxes now, ever-increasing debt would eventually prove unsustainable.
‘The Government is choosing to ramp up borrowing just as it becomes more expensive to do so, in a gamble on growth that may not pay off.
The surge in the cost of living has wreaked havoc with public finances. The interest bill on the UK’s £2.4trillion debt mountain hit £8.2billion last month, the highest figure for August since records began in 1997, according to the Office for National Statistics
‘Getting that scale of increase in trend growth, while not impossible, would require either a great deal of luck over a long period or a concerted change in policy direction.’
Miss Truss has argued that a change of tack from her predecessors is needed to boost Britain’s growth. Rather than opting to claw more money into the Treasury’s coffers through ever-rising taxes, she has vowed to cut them in a bid to make Britain a more attractive country to do business.
Officials at the Bank, who are preparing to hike rates for a seventh consecutive month, have been put in a tricky position.
While ramping up the base rate above its current 1.75 per cent should help to tame inflation, by encouraging saving rather than spending, it also bumps up the cost of borrowing for all and puts a damper on economic growth.
On a typical £250,000 mortgage, monthly payments would rise by £100 if rates climb by 0.75 percentage points.
Bank governor Andrew Bailey has said dealing with the cost of living crisis was his priority.
Mr Kwarteng said yesterday: ‘I have pledged to get debt down in the medium term. However, in the face of a major economic shock, it is absolutely right that the Government takes action now to help families and businesses, just as we did during the pandemic.’
Last night the US central bank raised interest rates for the third time in a row. The Federal Reserve raised rates by 0.75 percentage points, lifting the target interest range of 3 per cent to 3.25 per cent. It warned of ‘ongoing increases’ as it tackles soaring prices.
The move followed that of the European Central Bank, which raised interest rates by 0.75 percentage points this month for the first time since the euro’s launch in 1999.