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UK has no alternative to interest rate rises - Hunt UK has no alternative to interest rate rises - Hunt
(about 2 hours later)
The UK has "no alternative" but to hike interest rates in a bid to tackle rising prices, the chancellor has said.The UK has "no alternative" but to hike interest rates in a bid to tackle rising prices, the chancellor has said.
Jeremy Hunt said inflation - the rate at which prices rise - was the "number one challenge we face".Jeremy Hunt said inflation - the rate at which prices rise - was the "number one challenge we face".
He said the government would be "unstinting in our support" for the Bank of England "to do what it takes" to slow inflation.He said the government would be "unstinting in our support" for the Bank of England "to do what it takes" to slow inflation.
Rising interest rates and mortgage costs weighed on UK economic growth in April.Rising interest rates and mortgage costs weighed on UK economic growth in April.
While the economy grew by 0.2%, the Office for National Statistics said that housebuilders and estate agents had a "poor month".While the economy grew by 0.2%, the Office for National Statistics said that housebuilders and estate agents had a "poor month".
What is GDP and how does it affect me?What is GDP and how does it affect me?
Borrowing costs have been steadily rising since December 2021 to a current 4.5% in an attempt to slow consumer price inflation, which stands at 8.7%. Borrowing costs have been steadily rising since December 2021 to a current 4.5% in an attempt to slow consumer price inflation, which stands at 8.7% - well above the Bank of England's 2% inflation target.
This is more than four times the Bank of England's 2% inflation target.
In theory, raising interest rates means it is more expensive for people to borrow and they have less money to spend. Consequently, they will buy fewer things which should slow the rate of rising prices.In theory, raising interest rates means it is more expensive for people to borrow and they have less money to spend. Consequently, they will buy fewer things which should slow the rate of rising prices.
An increase in interest rates means higher monthly mortgage, credit card and loan payments for some people. Although higher rates should benefit savers - if banks pass it on to their customers. An increase in interest rates means higher monthly mortgage, credit card and loan payments for some people. But higher rates should benefit savers - if banks pass them on to their customers.
Asked if he was following former Chancellor John Major's dictum in 1989 that "if it isn't hurting, it isn't working", Mr Hunt said: "In the end there is no alternative to bringing down inflation, if we want to see consumers spending, if we want to see businesses investing, if we want to see long-term growth and prosperity. Asked if he was following former chancellor John Major's dictum in 1989 that "if it isn't hurting, it isn't working", Mr Hunt said: "In the end there is no alternative to bringing down inflation, if we want to see consumers spending, if we want to see businesses investing, if we want to see long-term growth and prosperity."
"We have to do everything we can as a government, as a country, to support the Bank of England in their mission to squeeze inflation out of the system."
The government has no say over interest rates since the Bank of England was granted independence in 1997.The government has no say over interest rates since the Bank of England was granted independence in 1997.
The Bank's main responsibility is setting interest rates and keeping inflation at or near its target. It faces a balancing act as higher borrowing costs could hamper economic growth. The UK economy expanded in April after shrinking by 0.3% in the previous month. For the three months to April, it grew marginally by 0.1%.
The UK economy expanded in April after shrinking by 0.3% in the previous month. For the three months to April, the UK economy grew marginally by 0.1%. The ONS said strong trade in bars and pubs boosted growth, but added the construction sector had faltered as rising interest rates and mortgage costs made house buyers more cautious.
The ONS said strong trade in bars and pubs boosted growth.
But it added that said the construction sector had faltered as rising interest rates and mortgage costs made house buyers more cautious. One housebuilder told the BBC people were "holding back" on buying homes.
As interest rates have risen and more people are coming to the end of fixed-rate mortgage deals, some lenders have been withdrawing certain mortgages from the market.As interest rates have risen and more people are coming to the end of fixed-rate mortgage deals, some lenders have been withdrawing certain mortgages from the market.
First-time buyers are being met with higher rates, leaving some priced out, and renters are also facing higher costs due to landlords selling up.First-time buyers are being met with higher rates, leaving some priced out, and renters are also facing higher costs due to landlords selling up.
Ian Burns, who runs Cameron Homes in Staffordshire, said people were being "very cautious" and were "taking longer to make decisions". Hiking rates is meant to persuade consumers to spend less - as their cost of borrowing rises or rates on savings accounts increase - giving businesses less scope to raise prices.
"Over the past three or four weeks, we've seen a slowdown in reservations and ultimately, if that doesn't pick up, then we have to slow down the build operation," he told BBC Wake up to Money. But that mechanism may have become less effective over time.
Take mortgages. In the early 2000s, more than seven out of 10 residential mortgages were on variable or tracker rates, immediately impacted by rate hikes. Today, it's 15% of homeowners. Even adding in the 1.8 million who are re-mortgaging this year, means it's still, contrary to a couple of decades ago, the minority of mortgage holders who will be affected.
The impact of rate hikes is less widespread and may be taking longer to filter through.
Equally, banks and building societies have been particularly reluctant to pass on rate hikes to savers this time, as the Bank of England and outraged customers have noted. This may in part reflect savings institutions rebuilding margins after a period of ultra-low interest rates - but gives customers less of an incentive to stash spare cash.
Higher interest rates also should mean businesses have less scope to give workers inflation-matching pay rises than in the past - but a shortage of workers makes this less likely this time.
Even if, as some economists fear, interest rate rises are less effective this time, they remain the main tool for fighting inflation.
Ian Burns, who runs Cameron Homes, a housebuilder in Staffordshire, said people were being "very cautious" and were "taking longer to make decisions".
"Over the past three or four weeks, we've seen a slowdown in reservations," he told the BBC's Wake up to Money.
"We can't just continue to build houses if we don't have customers for them.""We can't just continue to build houses if we don't have customers for them."
Guy Gittins, chief executive of Foxtons estate agents in London, said the "power balance" between buyers and sellers had "shifted". He said this meant "serious sellers had to get a little bit more competitive with pricing". Stronger-than-expected wage growth for workers in the three months to April has raised the prospect that the Bank could raise rates close to 6% by the end of the year in its bid to reduce inflation.
The Bank of England is widely expected to lift interest rates again when its Monetary Policy Committee meets next week. But the New Economics Foundation, a think tank promoting social and economic justice, said the Bank should hold off on raising rates further and wait to see the impact of its previous increases.
But stronger than expected wage growth in the three months to April has raised the prospect that rates could rise close to 6% by the end of the year. Its economist Lukasz Krebel said that while UK wages were rising, they were still not keeping up with inflation, meaning people were poorer in real terms.
Five reasons why mortgages are getting us down He added that rising prices were mainly due to supply side issues, such as worker shortages and Russia's invasion of Ukraine sending energy prices soaring.
Yael Selfin, chief economist at accountancy firm KPMG UK. said "major challenges" remained for the UK economy. "The UK government and the Bank should look to address underlying weaknesses that expose the UK to such inflation shocks - notably by supporting investment in clean energy and building retrofits to reduce our reliance on volatile fossil gas," he said.
She added it was likely the Bank of England would continue its rate hiking cycle "putting further pressure on both households and businesses as they face higher borrowing costs". Labour's shadow chancellor Rachel Reeves said the figures represented "another day in the dismal low growth record book of this Conservative government".
Labour's Shadow Chancellor Rachel Reeves said the figures represented "another day in the dismal low growth record book of this Conservative government".
"The facts remain that families are feeling worse off, facing a soaring Tory mortgage penalty and we're lagging behind on the global stage.""The facts remain that families are feeling worse off, facing a soaring Tory mortgage penalty and we're lagging behind on the global stage."
Related TopicsRelated Topics
GDPGDP
Economic growthEconomic growth
UK economyUK economy
Office for National StatisticsOffice for National Statistics