British homeowners have been warned to brace for a “significant” rate hike from the Bank of England in response to Kwasi Kwarteng’s tax-cutting mini-budget last week.
Threadneedle Street chief economist Huw Pill added to the concerns of millions of mortgage payers who have already seen hundreds of home loan products withdrawn by lenders in anticipation of a sharp rise in the cost of borrowing.
As financial markets signaled that the bank might need to hike interest rates as high as 6%, Santander, HSBC and Nationwide were among the big lenders to indicate the end of cheap mortgages was coming to an end.
About one in ten deals has disappeared this week, according to online mortgage platform Dashly. There were 7,490 residential and rental mortgage products available Monday, but as of Tuesday night there were 6,609, down nearly 12%.
The Bank of Ireland, Clydesdale Bank, Post Office Money and a number of building societies including Monmouthshire, Furness and Darlington were among those withdrawing productss.
Pill tried to downplay the possibility of an emergency rate hike across the board ahead of the next scheduled meeting of its nine-member monetary policy committee in early November.
But he made it clear that a significant hike in official interest rates from the current 2.25% is on the horizon – a move that will affect borrowers with adjustable-rate mortgages and those whose fixed-rate operations are phasing out.
“In my view, a combination of the fiscal announcements that we’ve seen will act as demand stimulus in the economy,” Pill said of the mini-budget. “It’s hard not to conclude that this will require a significant policy response.”
The pound struggled again towards the end of trade, slipping below $1.07 against the US dollar after reports that Kwarteng had to persuade a reluctant Liz Truss of the need to issue a Treasury Department statement on Monday to quash the mess counteract the market.
The fallout from the mini-budget not only affected sterling, but continued to affect other financial markets, with interest rates paid by the government on its debt rising sharply.
The cost of borrowing for five years was higher for the UK than for Greece or Italy. Another sign that holding British assets is perceived as risky is that the interest rate on 10-year government bonds reached 4.5%, double the interest rate paid by Germany.
The gap between UK and German bonds was the widest since 1991, while the rise in UK 10-year borrowing costs in recent days has been estimated as the biggest shift in gilt yields since 1976, when a run on sterling prompted a bailout 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 sterling and the rise in bond yields, the FTSE 250 index of UK mid-cap company shares closed last night at its lowest level in almost two years.
German Finance Minister Christian Lindner joined a growing list of politicians and economists who have expressed doubts about the Truss government’s attempt to boost growth at a time when the Bank of England is raising interest rates.
“A big experiment is starting in Great Britain, in which the state is stepping on the gas and the central bank is stepping on the brakes at the same time,” said Lindner.
Larry Summers, a former US Treasury Secretary, warned that sterling’s recovery could be short-lived and that the UK government’s “completely irresponsible” plans could drag the pound below par against the euro and the dollar.
“The first step to regaining credibility isn’t to say incredible things. I was surprised when the new chancellor spoke of the need for further tax cuts over the weekend. I cannot understand how the Bank of England, knowing the government’s plans, decided to act so timidly.”
Virgin Atlantic has urged the government to consider a “reversal” after the mini-budget as weaker sterling drives up costs for airlines.
Shai Weiss, its chief executive, said the economic situation was “hurting consumers” and the airline was deeply concerned, although it believed its own bookings would hold up.
Kwarteng dismissed any suggestion to reconsider last week’s package and, at a meeting with UK bank officials, insisted he was right to call for £45bn in tax cuts from 20% to 19% of the income tax rate and the removal of the 45% rate. , paid by people earning more than £150,000 a year.
“We responded in the short term with an expansionary fiscal stance in energy because we had to. We had to intervene in two exogenous shocks – Covid-19 and Ukraine. Our 70-year high tax burden was also unsustainable,” the Chancellor told bankers.
“I am confident that our approach with our growth plan and the forthcoming medium-term financial planning – in close cooperation with the bank – will work out.”
Downing Street dismissed talk of a split between No 10 and No 11 over how to deal with market reaction to the mini-budget and denied there had been any dispute.
However, Whitehall sources said there were talks in the civil service over a dispute between the Prime Minister and the Chancellor at Monday morning’s meeting.
Sky News said Truss opposed Kwarteng’s suggestion that a Treasury Department statement was needed to calm markets.
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