RUTH SUTHERLAND: The Tories face a dire economic scenario as markets fear interest rates could rise more than previously expected, with very nasty consequences for millions of families and firms
When Rishi Sunak and Jeremy Hunt took over in Downing Street, the message was that they were reassuringly boring and the economy would be safe in their hands.
So how come the market in gilts – or UK Government bonds – was blaring an even louder alarm klaxon yesterday morning than it was after the disastrous Truss and Kwarteng mini-Budget?
The answer, in a word, is inflation. The market was spooked because figures showed wages increasing at such a pelt, raising fresh fears about the Bank of England’s ability to quash rising prices. Traders now think interest rates will probably have to go up by more than previously expected, with very nasty consequences for millions of families and firms.
This is a dire scenario for the Conservatives, whose electoral prospects are already looking grim. The idea of heading into an election in the midst of a housing market crisis, should one materialise, does not bear contemplation. It might not – more than half of owner-occupiers are mortgage free – but with the market’s expectations for rates, such a prospect cannot be ruled out entirely.
RUTH SUNDERLAND: When Rishi Sunak and Jeremy Hunt took over in Downing Street, the message was that they were reassuringly boring and the economy would be safe in their hands
Virtually everyone in the City is now expecting another rate rise from the Bank next week, making it the 13th in a row.
Mortgage lenders have already been pulling deals and hiking their rates in anticipation.
READ MORE: Homeowners face yet more mortgage pain as markets predict interest rates could hit 6% by the end of the year
Around 430,000 families will see their current fixed rates come to an end every quarter this year, and when they do it is going to hurt. Experts at Capital Economics calculated that even before yesterday’s market jitters, people re-mortgaging after a two-year fix would typically see their rate jump from 1.4pc to 5.2pc.
That is a £300-a-month increase for someone who took out a 75pc mortgage on a £240,000 house in June 2021, taking the cost to £1,000 a month.
Such are the real world consequences of allowing inflation, which had been quiescent for more than two decades, to run out of control. It is the job of Bank of England governor Andrew Bailey to keep inflation within its 2-per-cent target range.
He is fond of blaming his failure on disrupted supply chains due to the Covid lockdowns and the spike in energy costs following Russia’s war on Ukraine.
They were indeed factors and they affected other countries as well as Britain. But inflation seems to be coming to heel in other developed economies to a greater extent than it is here.
RUTH SUNDERLAND: Hunt’s Budget trick – learned from Sunak – of freezing tax thresholds and allowances will do nothing to help persuade economically inactive individuals to come back to work. Quite the reverse
In the Eurozone, it came in at a touch over 6 per cent in May, which was lower than expected.
In the US, it has fallen back to 4 per cent from 4.9 per cent in April, so American households and businesses are expected to be spared a rate hike this week.
Bailey brushed off the threat of rising prices for far too long and should have acted earlier.
But Messrs Sunak and Hunt, who have set their own target to halve inflation by the end of this year, must play their part – and have a long, hard think about the labour market and the implications of the tax burden they have imposed on working families.
Although the unemployment rate is very low, nearly nine million Britons of working age are ‘economically inactive’ at a time when shortages of labour are an enormous hindrance to prosperity.
The labour drought is holding back growth, pushing up wages and egging on union barons in their unreasonable pay demands. These wage rises risk becoming ‘baked in’ to inflation, yet the Government has so far seemed impotent when it comes to quelling the union belligerence.
Hunt’s Budget trick – learned from Sunak – of freezing tax thresholds and allowances will do nothing to help persuade economically inactive individuals to come back to work. Quite the reverse.
RUTH SUNDERLAND: Bailey brushed off the threat of rising prices for far too long and should have acted earlier
This so-called fiscal drag acts as a powerful deterrent to older professionals who have retired early but may be considering a return to work. Why would they go back, if even more of their pay packet will be docked at 40 or 45 per cent?
Home-ownership, low inflation, low taxes and freedom from industrial strife are core Conservative values.
Margaret Thatcher had an instinctive grasp of this when she swept into power in 1979 and took control of a battered economy. Her heirs forget it at their peril.
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