Even Rishi Sunak's aides are sweating over their mortgages as Tory troubles deepen

Rishi Sunak was concerned that Boris Johnson's government's unprecedented level of spending during the Covid pandemic could cause inflation. Photo: Henry Nicholls/Getty

Two years ago, the loss of a 16,000-strong constituency in Chesham and Amersham by the Conservatives caused great concern among ministers and supporters.

Boris Johnson's proposed planning reforms, enthusiasm for High Speed​ ​2 and a blatant rejection The deputies blamed traditional conservative politics, frightened by the loss of what was considered a safe place.

But at the Treasury, Rishi Sunak, who was then chancellor, privately feared that the fortunes of the Tories would become immeasurably worse. He was concerned that the Johnson government's unprecedented level of spending during and after the Covid pandemic could cause inflation and spark a cost-of-living crisis for which the Conservatives could be severely punished in the next election.

Allies note that he first raised concerns about inflation in a December 2020 Spectator interview, when he warned: “There is a very massive QE [quantitative easing] going on. Nobody has done this yet. There are many smart investors who are also thinking about the risks of inflation over the next 12 months.” He added: «Obviously borrowing at these levels is not practical.»

Rishi Sunak and Jeremy Hunt declined the calls. for government assistance to holders of mortgage loans

Mr. Sunak's fears have come true, and he, the prime minister, is responsible for running the country in a situation that a senior minister called «as bad as it gets.»

Mr. Sunak and Jeremy Hunt, the chancellor, turned down calls for yet another giant government bailout, this time for mortgage holders, in large part because of the prime minister's concerns about the potentially devastating effect another injection of cash could have on inflation.

But as the prime minister who pledged in January to halve inflation by the end of the year, Mr. Sunak has taken public responsibility for the issue and now faces an omnipotent public reckoning if inflation, and with it interest rates, does not subside before elections next year. Senior Conservatives are already 25 points behind Labor in the latest YouGov poll and fear the gap could widen even further as Tory supporters turn away in anger at the rise in bills.

Sunak's concerns were clear to friends throughout 2021 . By June of that year, he and his team were beginning to worry that all the factors that had allowed the Liberal Democrats to topple the Tory majority in Chesham would eventually overshadow a future cost crisis. life is a phrase that has dominated political discourse ever since.

Mr. Sunak was increasingly irritated by Mr. Johnson's apparent inability to, in his view, say no to costly interventionist policies. While he saw measures like the £70bn layoff scheme as vital, he feared an omnipotent voter backlash against what could be seen as government squandering during and after the pandemic if Britain does enter a cost-of-living crisis in a dream .

In the months that followed, Mr. Sunak began to vent his annoyance at Mr. Johnson's high spending to his colleagues in polite but blunt remarks. The National Insurance hike, announced in September 2021, was a necessary evil to fund Mr Johnson's insistence on a £12 billion a year increase in NHS funding and a new welfare model, as Mr Sunak suggested to MPs.

However, he was increasingly concerned about the prospect of rising prices and whether this would lead to worse inflation if the government continued to use its approach to high spending in an «inflationary environment».

At the same time, Andy Haldane, the outgoing chief economist at the Bank of England, publicly warned that the Monetary Policy Committee (MPC) must urgently shift its focus to controlling the cost of living. In a speech on 30 June 2021, he warned that high inflation was becoming «a major expectation, not a risk» and said the time had come to «highlight» the Bank's commitment to keeping inflation at 2%. By this point, inflation in the UK had barely hit 2.1%.

Mr Haldane added: will not just be a surprise, but a much more unpleasant surprise than we planned.»

But Andrew Bailey, bank governor and MPC chairman, was quick to dismiss his outgoing chief economist's analysis, insisting that inflation would only be a temporary problem. «It's important not to overreact to temporarily strong growth and inflation,» he said.

Fears that Mr. Bailey was wrong

A year later, fears grew in government that Mr. Bailey was wrong. Inflation topped 8%, five points above the Bank's target, and members of Boris Johnson's cabinet began to privately oppose Mr. Bailey.

Speaking of the Bank, a cabinet minister said government officials «are now questioning its independence,» suggesting that Mr. Sunak do more to hold Mr. Bailey accountable. At present, the only formal consequence of the Bank not meeting its 2% target is that Mr. Bailey must write to the Chancellor explaining why.

Since the Bank's independence in 1997, successive governments have shied away from criticizing its approach, and in response to a Cabinet Minister's comments on government discussions, a source in the Treasury warned that the Bank's independence is «sacred.»

Mr. Sunak's insistence on avoiding the impression of any criticism of Mr. Bailey from the government led to a clear division in the leadership race last summer.

Liz Truss caused controversy when she announced that she would review the Bank's powers «to make sure they are tight enough on inflation.»

Mr Sunak opposes tax cuts

Mr Sunak vehemently rejected such an approach. He also strongly rejected Ms. Truss' plan to cut taxes, saying it would spur inflation.

As prime minister since October, Mr. Sunak has taken both approaches, with the government only relying on clear answers from Mr. Bailey to express its concerns about getting out of control of inflation and resist calls for personal tax cuts.

Interestingly, in his latest response to the governor on Thursday, Mr. Hunt appears to have adopted stronger language than before, warning the Bank that the 2 percent target should apply in good weather and bad weather alike.

«Our commitment to this goal is unshakable and always relevant,» Mr. Hunt wrote Mr. Bailey on Thursday.

After promising early in the year to halve inflation by the end of 2023 — a change not entirely under his control — Mr. Sunak on Thursday illustrated the emergency he's currently in by assuring voters: «I'm 100 percent on it. everything will be fine.”

Source #10 said last week's data showing CPI inflation remained at 8.7% a year through May “confirmed” Mr. Sunak's decision focus on halving inflation from over 10 percent in January.

«Rishi was right»

Critics argued that the target would be «easy» to achieve, given that forecasts had already shown inflation to fall to 2.9%. “Rishi didn't buy any of this in January and certainly doesn't buy it now. And once again, [he] was right,” the source said.

Mr. Sunak and his team, however, are deeply concerned about persistent inflation and the resulting rise in mortgages, which has already led to an increase in the average-annual fixed rate up to more than 6 percent.

«It's all very bleak — as bad as it gets, in fact,» said one senior minister. «The Bank of England was not alone among the central banks, but they did suffer significant setbacks.» A growing number of MPs and ministers believe that the emergency mortgage rate hike is the final nail in the coffin of the Conservatives in hopes of winning the next election. «These are our people,» said one Tory source whose own mortgage is due for renewal.

Some government officials, including cabinet members, also fear that Mr. Sunak is missing out on opportunities to win over voters with his ambitious policies in the year leading up to the election. One minister said that No. 10 seemed to be blocking many policies, stating: “Where is the vision? We don't do anything.» Privately, some Tory figures admit that voters will have the right to punish the party for driving a housing crisis that most admit the government has failed to solve in any meaningful way.

Gloomy Wednesday night talks< p>Now soaring inflation and mortgage rates seem to be an even more difficult problem to solve. Mr. Sunak and Mr. Hunt had grim talks on the matter on Wednesday evening.

The ONS figures «came as a surprise,» a government source said. “Market expectations, both internal and external, were that it would fall 0.2% and it remained unchanged.” But both men were «totally determined» to continue on their current path, including abandoning spending plans and tax cuts that they thought would exacerbate inflation.

The prime minister and the chancellor had already decided that bailing out mortgages is out of the question.

A Treasury source called calls for a £3bn mortgage protection fund «crazy». Likewise, the Prime Minister and the Chancellor rejected the Conservative MPs' demands for the return of Margaret Thatcher's program for the interest relief on mortgage loans at source (Miras), which is in fact a tax cut for mortgage holders.

“Miras will be inflationary and … there is moral hazard when those who do not have mortgages subsidize those who do,” said a Treasury Department source.

Breathing space for homeowners

Instead, the Prime Minister and Chancellor hatched a plan to ask lenders to give homeowners a breather when they're on the edge of a mortgage cliff. Mr. Hunt effectively forced bank executives to sign the plan at a meeting on Friday. After an initial silence, everyone around the table eventually agreed to the proposals, according to the source.

Now, Mr. Sunak and Mr. Hunt plan to cite the inflation figures as evidence that they cannot go along with the unions' demands for massive wage increases. The couple will also seek to rein in government spending in Whitehall.

«He wants to do what's right in the long run,» an ally of the prime minister said. This week, #10 will cite the publication of the National Health Service's long-term workforce plan as an example of this approach.

But ultimately, unless inflation comes down, Mr. Sunak opposes tax cuts. in the absence of a recovery, the Conservatives may be left with little opportunity to convince voters that they can cut spending.

In such a scenario, next year's Tory campaign will be focused on insisting that Labor's approach will result in tens of billions of pounds a year of borrowing and a generous increase in public sector wages, which will spur inflation.

Simply put, one government source said: “Our message will be if you think that's bad, you haven't seen anything yet.”