Mortgage crisis to deepen as Bank unexpectedly hikes interest rates to 5%

The move is set to deepen the mortgage crisis as borrowing costs are hiked up for the 13th time in a row. The 0.5 percentage point increase was the sharpest increase since February, surprising economists who had been expecting a smaller hike of 0.25 percentage points.

It follows a higher-than-expected inflation reading in May as continued price rises forced policymakers into action in a bid to bring inflation down to the 2% target. It comes amid growing calls for the Government to do more to help mortgage borrowers who are set for a big jump in their monthly repayments.

Responding to the interest rate rise, Chancellor Jeremy Hunt said: “High inflation is a destabilising force eating into pay cheques and slowing growth. “Core inflation is higher in 14 EU countries and interest rates are rising around the world, but the lesson from other countries is that if you stick to your guns, you bring inflation down. “Our resolve to do this is watertight because it is the only long-term way to relieve pressure on families with mortgages. If we don’t act now, it will be worse later.”

Commons Leader Penny Mordaunt acknowledged people feel they are being “clobbered from all sides” but said the Government will do “all we can” to help with this “tough time”.

Ms Mordaunt, responding to calls from Labour MP Jon Trickett (Hemsworth) for a “new economic settlement”, told the Commons: “Myself and this Government do appreciate how people are feeling at this time, people are feeling they’re being clobbered from all sides, and particularly those on fixed incomes, whether it’s housing costs, food inflation, energy prices, it is a very difficult time for many, many people in this country.

“We have this perfect economic storm that we have to weather, exacerbated by things that are going on around the world at the moment, but we have to weather this storm and we’re going to do all we can to see individuals and families through this tough time.

“That is why we have a £94 billion support package on cost of living, why we’re adapting that, why we’re listening to people’s needs as they change.”

On mortgages, Ms Mordaunt referred Mr Trickett to previous remarks by Prime Minister Rishi Sunak as she noted: “This is a priority for us.”

Bank of England governor Andrew Bailey has warned that further rate rises could be required if inflation remains stubbornly high. In a letter to Chancellor Jeremy Hunt setting out the Monetary Policy Committee (MPC) decision, he said the “second-round effects in domestic price and wage developments” following the external shocks of the pandemic and war in Ukraine “are likely to take longer to unwind than they did to emerge”.

He added: “The MPC will continue to monitor closely indications of persistent inflationary pressures in the economy as a whole, including the tightness of labour market conditions and the behaviour of wage growth and services price inflation. “If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.”

The pound edged higher on the bigger-than-expected rate rise. Sterling lifted 0.12% to 1.28 US dollars and was 0.02% higher at 1.16 euros after the decision.