Property price chat, Tube delays, torrential rain – this morning doled out a full house of London bingo. And then the Bank of England said ‘hold my £8.50 beer’.
Interest rates have risen by 0.75 percentage points to 3 per cent, their highest level since October 2008 and the largest single hike in more than 30 years. That was November 1989, when rates climbed from 13.75 per cent to 14.875 per cent – a reminder that today’s rates remain low by historical standards.
The most immediate impact will be felt by the 850,000 or so people with tracker mortgages. Today’s rise will add around £115 to the monthly bills of a homeowner with a typical £300,000 tracker loan. The Standard revealed earlier this week that monthly bills have now risen £420 from £1,359 to £1,779 over the past year for owners with a mortgage of this size.
Those on fixed mortgages are protected, but estimates suggest that roughly 300,000 borrowers come off their fixed-rate deal every three months. At which point, they will endure far more expensive replacements. (The Bank expects rates to continue rising before peaking at 4.5 per cent late next year, which is at least below the 6 per cent feared in the immediate aftermath of the mini-budget.)
Why are Governor Andrew Bailey and the Monetary Policy Committee (MPC) doing this to us? The Bank is charged with keeping inflation low and stable, with a specific target of 2 per cent. But inflation in September hit 10.1 per cent which is, erm, more.
Inflation is bad because it eats away at savings, earnings and if it gets locked into the system can feed on itself as workers demand ever-higher wages to maintain living standards. One of the main tools policymakers possess is controlling the money supply through higher interest rates. This generally does a pretty good job of bringing inflation down, with one obvious downside risk: recession.
That is because higher interest rates drive the cost of borrowing up, leaving mortgage holders with less disposable income. As such, the Bank is now forecasting a two-year recession. This would represent the longest (though not the deepest) contraction in history, and likely means the next election will not take place until pretty late in 2024.
Ominously, the MPC said its forecast “does not incorporate any further measures that may be announced in the Autumn Statement” scheduled for 17 November. Given that event is likely to involve some combination of tax rises and spending cuts – this will further sap consumer demand and worsen the recession.
The political challenge for the government is massive, potentially overwhelming. It is possible to win an election following a recession, as John Major achieved in 1992. But it is difficult. Even more so when the public blames you for higher borrowing costs.
As, by the way, does the Bank itself. It notes that while global events have impacted our economy, “UK-specific factors played a very significant role“ i.e. the catastrophic mini-budget which led to what Bailey termed “a premium on UK rates”. That is difficult to explain away, no matter how often you change your leader.
Elsewhere in the paper, Russia says the world’s nuclear powers are ‘on the brink of armed conflict’. (If that comes to pass, it probably won’t matter that I’ve relegated the story to the ‘elsewhere’ section of the newsletter.)
In the comment pages Lucy Fisher, chief political commentator at Times Radio, says that from I’m a Celebrity to Strictly, politics is increasingly a crossover genre with reality TV. While Emma Loffhagen hopes her Instagram tattoo studio hell story will serve as a warning to us all.
And finally, craving less than a meal but more than a tic tac? Joanna Taylor is on hand with London’s best snack spots.
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