Britain’s homeowners have been warned to brace themselves for a “significant” increase in interest rates from the Bank of England in response to Kwasi Kwarteng’s tax-cutting mini-budget last week.
Huw Pill, Threadneedle Street’s chief economist, added to the concerns of millions of mortgage payers who have already seen hundreds of home loan products pulled by lenders in anticipation of a big increase in the cost of borrowing.
With the financial markets signalling that the Bank might need to raise interest rates as high as 6%, Santander, HSBC and Nationwide were among the big lenders indicating that the end of cheap mortgages was coming to an end.
Roughly one in 10 deals have disappeared this week according to the online mortgage platform Dashly. On Monday there were 7,490 residential and buy-to-let mortgage products available but by Tuesday evening there were 6,609, a drop of nearly 12%.
The Bank of Ireland, Clydesdale Bank, Post Office Money and a slew of building societies including Monmouthshire, Furness and Darlington were among those withdrawing products.
Pill sought to play down the possibility of an emergency rate hike from the Bank before the next scheduled meeting of its nine-strong monetary policy committee in early November.
But he made it clear a sizeable increase in official interest rates from their current 2.25% was in prospect – a move that will affect borrowers on floating-rate mortgages and those whose fixed-rate deals are ending.
“In my view, a combination of the fiscal announcements we have seen will act as a stimulus to demand in the economy,” Pill said of the mini-budget. “It is hard not to draw the conclusion that this will require a significant monetary policy response.”
The pound again struggled in late trading, falling below $1.07 against the US dollar amid reports that Kwarteng had to persuade a reluctant Liz Truss of the need to put out a Treasury statement on Monday intended to counter the mayhem in the market.
As well as affecting sterling, the fallout from the mini-budget continued to reverberate through other financial markets, with sharp increases in the interest rates paid by the government on its debts.
The cost of borrowing for five years was more expensive for the UK than for either Greece or Italy. In another sign of the perceived riskiness of holding UK assets, the interest rate on 10-year government bonds hit 4.5%, double the rate paid by Germany.
The gap between UK and German bonds was the largest since 1991, while the surge in UK 10-year borrowing costs in recent days was estimated to be the biggest shift in gilt yields since 1976, when a run on the pound resulted in a rescue package from the International Monetary Fund.
Pill said the Bank was not “indifferent” to recent moves in UK asset prices. In addition to the fall in the pound and the rise in bond yields, the FTSE 250 index of shares in middle-ranking UK companies closed last night at its lowest level in almost two years.
Christian Lindner, Germany’s finance minister, joined the lengthening list of policymakers and economists expressing doubts about the Truss government’s attempt to stimulate growth at the same time as the Bank of England was raising interest rates.
“In the UK, a major experiment is starting as the state simultaneously puts its foot on the gas while the central bank steps on the brakes,” Lindner said.
Larry Summers, a former US Treasury secretary, warned that sterling’s respite might be short-lived and that the UK government’s “utterly irresponsible” plans could drag the pound below parity against the euro, as well as the dollar.
“The first step in regaining credibility is not saying incredible things. I was surprised when the new chancellor spoke over the weekend of the need for even more tax cuts. I cannot see how the Bank of England, knowing the government’s plans, decided to move so timidly.”
Virgin Atlantic urged the government to consider “reversing course” after the mini-budget, with the weaker pound massively driving up costs for airlines.
Shai Weiss, its chief executive, said the economic situation was “hurting consumers” and the airline was deeply concerned, even though it believed its own bookings would hold up.
Kwarteng rejected any suggestion that he might rethink last week’s package, insisting in a meeting with representatives of UK banks that he was right to announce £45bn of tax cuts, which included the reversal of April’s increase in national insurance contributions, a drop in the basic rate of income tax from 20% to 19% and the scrapping of the 45% rate paid by those earning more than £150,000 a year.
“We have responded in the immediate term with expansionary fiscal stance on energy because we had to. With two exogenous shocks – Covid-19 and Ukraine – we had to intervene. Our 70-year-high tax burden was also unsustainable,” the chancellor told bankers.
“I’m confident that with our growth plan and the upcoming medium-term fiscal plan – with close cooperation with the Bank our approach will work.”
Downing Street rebuffed talk of a split between No 10 and No 11 over how to deal with market reaction to the mini-budget, and denied that there was a row.
However, Whitehall sources said there was talk within the civil service of an argument between the prime minister and chancellor at the meeting on Monday morning.
Sky News said Truss had been resisting Kwarteng’s suggestion that a Treasury statement was needed to calm the markets.