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- By Faisal Islam
- Economics editor
Image source, Getty Images
The news from the mortgage market is grim. Spend any time in the office of a mortgage broker over the past week and you hear words like “shocking” and “terrible” as they join multi-thousand digital queues to try to snaffle the last few bargain fixed-rates deals available on their systems.
Banks have been pulling entire rosters of mortgage deals without notice at weekends on multiple occasions within a week. Some describe customers who failed to get organised six months ago as “feeling sick”.
Our news teams have been deluged with examples of families in utter shock at hikes in mortgage rates of hundreds of pounds per month. It is regularly coming up in interviews on entirely separate stories, such as the jobs market, energy prices or long Covid.
The past week seems like a tipping point. Even a month ago there was a consensus that a soft landing for the economy was coming, that recession would be avoided, that light was appearing at the end of the tunnel.
But there is unexploded ordnance in the UK economy, and there are fears that it will start to ignite, especially in the coming week.
The jitters started with the last inflation figure for April, meant to be a turning point after three years of relentless shocks, showing the end of double-digit inflation.
It did fall, but significantly less than expected, and core inflation – a measure that strips out the most volatile components such as food and energy – went up. The latest jobs data this week gave more evidence for the notion that UK inflation could stay higher for longer.
What emerged this week was the markets are now convinced that the UK is more inflation-prone than other similar economies, and that interest rates will also now be higher over the next year or two.
The interest rate for the UK government to borrow money over two years rose rather abruptly and higher compared to the US government.
The cost of borrowing for the UK is now higher than it was during the post mini-budget panic over the fiscal credibility of the Truss and Kwarteng administration. Markets believe base rates will go above 5% and stay close to that level into next year.
Speaking to the chancellor this week, Jeremy Hunt said that “we are in a very different situation to where we were last autumn”. It is true that there is no generalised market credibility panic. Sterling is reaching one-year highs against the dollar not, as it was last autumn, falling to record lows.
But there is a slow widespread squeeze on the economy.
Some insiders, such as the former top civil servant in the Treasury, Lord Nick Macpherson, have expressed concern that stubborn inflation will now require the Bank of England to raise rates enough to cause a pre-election recession.
I asked the chancellor if he was following his predecessor Sir John Major’s famous maxim on interest rates/high inflation that “if it isn’t hurting it isn’t working”.
Mr Hunt said: “In the end, there is no alternative to bringing down inflation… that’s why we will be unstinting in our support for the Bank of England.”
Economists now unanimously expect a further rate rise on Thursday. Inflation is expected to have fallen only modestly when the new figure is released on Wednesday, staying above 8%.
But there may be a more fundamental challenge for the Bank of England in asserting control over longer-term rates. The markets are making assumptions about sticky inflation, and therefore pre-emptively pushing fixed mortgage rates higher. As the National Institute of Economic and Social Research economist Jagjit Chadha puts it, the Bank’s miscommunication of its rate rise strategy risks “needlessly increasing the probability of recession”.
But there are also factors in government policy contributing to lingering inflation, from less competition in supply chains from Europe after Brexit, to worker shortages. Food inflation is already at its highest level since the 1970s, and yet that is where a much-delayed entirely new system of post-Brexit border controls on European food imports is due to be imposed at the end of the year.
But the impact of the already considerable series of rises is now starting to hit the mortgage market as a rump of homeowners roll off super-low fixed mortgage deals, many of which were signed two years ago in the mid-pandemic stamp duty holiday property boom. Measures of adjusted mortgage affordability are flashing red. Other pressures on disposable income are not going away.
The Sunak administration may have hoped that the economic pain of dealing with an inflation shock could be concentrated this year, well before a possible election. That is now very much in the balance.
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