ritain faces “difficult times” as the government and the Bank of England move to “knock” inflation out of the economy, Communities Secretary Michael Gove has warned.
As the Bank’s Monetary Policy Committee raised interest rates to 1.25 per cent on Thursday, Mr Gove said the UK was undergoing a “painful” economic ‘correction’ following the war in Ukraine and the consequences of the pandemic.
It is the fifth time in consecutive MPC meetings that the cost of borrowing has risen since December. This is the first time that rates have exceeded 1% since January 2009.
The Bank revealed that its economists now expect inflation to peak at just over 11% in October, when the next revision to the cap on energy bills takes effect.
Speaking at the Times CEO Summit in London on Thursday, Mr Gove said that while the government had a duty to help the “very poor”, pressure on public finances meant it was unable to deliver the level of support for people he would. As.
“We need to be clear that while government has a responsibility to help the poorest at a time when the cost of living is rising, we also have a responsibility to tackle the root causes of inflation,” did he declare.
“We certainly need a monetary policy that takes inflation out of the system and that will no doubt mean that we have to keep our finances under control and that we have to make sure that in the difficult period of the next few years we do not let’s not get knocked out of our way.
“I think it’s inevitable that when you squeeze inflation out of the system, you rely on the Bank of England and the government to have fiscal and monetary policy, which inevitably means we can’t do all the things we would like to do in ideal circumstances to help people through a difficult time.
“I think it’s an inevitable consequence of central bank policies that the UK and others have had to follow. There are inevitably tough times ahead for the UK and the global economy.
Mr Gove, whose department is responsible for the government’s ‘levelling up’ programme, said it was essential to address the UK’s regional inequalities otherwise ‘problems across our country will persist and worsen. will worsen”.
He called on business leaders to look to areas outside of London – including some of the ‘red wall’ seats the Tories took from Labor in the last general election – when considering where to locate new jobs. new investments.
“It’s the mission of the moment,” he said.
“I think companies here should be asking ‘What are we doing for Stoke, what are we doing for Sunderland, what are we doing for Burnley, what are we doing for Bassetlaw? as well as “What are we doing for our shareholders, our investors and our boards of directors?”
The MPC on Thursday voted by a 6-3 majority to raise the bank rate by 0.25 percentage points. The three minority members voted for a more dramatic increase of half a point to 1.5%.
The pound initially fell 1% against the dollar after the midday announcement, but rallied to retreat about 0.4%.
GDP is expected to fall 0.3% in the second quarter, raising the risk of a recession, defined as two consecutive quarters of negative growth. In May, the Bank forecast growth of 0.1% in the second quarter.
This decision will result in higher costs for businesses and for millions of homeowners with mortgages or personal loans. For a first-time buyer in London with a typical £250,000 tracker, mortgage bills will rise by £30 a month. For borrowers with a larger mortgage of £40,000, the increase will be £48.
However, the impact will not initially be felt by three-quarters of borrowers on fixed offers.
Further rate hikes are expected in the coming months, heightening fears that the rapidly rising cost of borrowing could tip Britain into recession. Inflation hit 9% in April, fueled by a spike in energy prices caused by the war in Ukraine.
Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown, said: “Inflation is likely to be slow poison to the economy, so the Bank of England is now trying to take an antidote by raising inflation. interest rate.
However, this can only take a small dose at a time given the sick nature of the economy. So he’s stuck with a rate hike of 0.25% to 1.25%, with more hikes to follow. This does not follow the US Federal Reserve’s written prescription of the most powerful drug of a more pronounced rise due to fears that a deep recession could ensue. The US central bank raised rates 0.75% yesterday, more than it had initially expected given fears of a price spike.
Andrew Hagger, personal finance expert at Moneycomms.co.uk, said: “The latest rise in mortgage payments will be a hammer blow to households across the country, who are facing a tsunami of increased costs for goods and essential services.
“These fixed rate customers will be protected for now, but when their fixed rate rolls around, some will face triple-digit monthly payment increases.”
Gemma Boothroyd, analyst at Freetrade, said: “Rising rates will ripple through the market, hitting businesses with different intensities. We’ve already seen companies in growth mode take a hit to their stock prices, as lofty valuations seem even harder to justify in a rising rate environment. Now, the sting will likely be felt even among reasonably priced companies.
The move comes after the US Federal Reserve raised its benchmark rate by 0.75% to a range of 1.5% to 1.75% yesterday, its biggest rise since 1994.
The Fed has already raised rates twice this year, by 0.25% in March and another half point in May.
Federal Reserve Chairman Jerome Powell said: “It is essential that we bring inflation down. Inflation has obviously surprised on the upside over the past year and more surprises may be in store.