Hunt warns there is no alternative to further cut interest rates

Chancellor Jeremy Hunt said a rate hike is inevitable amid continued inflation and strong wage growth. Credit: Zara Farrar/HM Treasury

Jeremy Hunt warned households there is «no alternative» to falling interest rates further as HSBC withdraws its mortgages from brokers for the second time in a week amid rising borrowing costs.

< p>The chancellor said the Bank of England will be forced to keep raising rates to cope with persistently high inflation, and traders are betting that the bank rate will rise from the current 4.5% to a 15-year high of 5.75%.

Economists suggested on Wednesday that growth at this scale would add nearly £2,000 to the typical household's annual mortgage bill.

The turmoil has overshadowed official data that showed GDP rose 0.2% in April, and analysts are increasingly fearful that the Bank will be forced to stifle growth and trigger a recession to bring prices under control.

Speculation about what's to come The rate hikes sent the pound to its highest level in more than a year against the dollar as currency traders hoped for better returns on their money. last two days to get close to $1.27, last reaching its current value in February 2022.

He was asked if he was following former Chancellor John Major's 1989 dictum that «if it doesn't hurt, it doesn't.» It doesn't work,” Hunt said in an interview with the BBC: “In the end there is no alternative to lower inflation.”

“If we want consumers to spend money, if we want companies to invest if we want to see long-term growth and prosperity.”

Banks are now looking to outpace the steady growth in borrowing. expenses.

In a sign of concern that has gripped major lenders, HSBC withdrew all new business mortgage products from its brokerage on Wednesday afternoon and will restart on Thursday with higher rates.

This is the bank's second revaluation in a week after it canceled mortgages on Friday and issued new ones on Monday morning.

A number of other players, including the Coventry Building Society, also announced about a further increase, and brokers expect more.

Rishi Sunak backed Mr. Hunt on the prime minister's questions, saying the government's «number one priority» is to bring down inflation. down.

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Andrew Wishart, manager of housing services at Capital Economics, said that if the bank rate rises to 5.75%, mortgage rates are likely to rise above 6%.

He said: «Notably, 5.75% was also the bank rate peak at the end of the 2006-2007 tightening cycle, pushing the average five-year fixed mortgage rate up to 6.3%.»

If rates reach 6.3%, the annual cost of taking out a typical £200,000 loan would rise by £1,920 from early May, when the average five-year fixed rate was 4.97% — Former Bank of England Governor Mark Carney warned that interest rates will remain high for many years.

In an interview with ITV, Mr Carney said British borrowers should prepare to pay higher rates on their debt for the foreseeable future, «not just for, you know, 12 months, 24 months.»

Analysts warn a recession is 'coming' even as the UK economy continues to outperform BoE expectations.

Ruth Gregory, Deputy Chief Economist at Capital Economics, said deferred losses in high interest rates mean the worst is yet to come .

Less than 40% of the burden of high borrowing costs will hit the economy by the end of June, Ms. Gregory said. She added: «More than 60 percent ahead.»

«That's why we still think there will be a recession in the second half of this year.»

Landlords will bear the brunt of the rate hike as the vast majority of mortgage holders enter into interest-only deals.

The 600,000 property owners are at risk of losses. Mr Wishart warned that by the end of 2024 if the bank rate rises to a peak of 5.75% during the pandemic and has been clinging to it ever since.

Sanjay Raja, an economist at Deutsche Bank, has calculated that families have already spent about £11bn of their excess savings, coinciding with a surge in mortgage overpayments and a rare drop in the overall level of mortgages. debts.

He said: «We expect more households to use their excess savings to try to offset the cost of living shock, especially as consumer confidence rises.»