Rishi Sunak has blamed the high number of fixed-rate mortgages for his government’s failure to bring down inflation.
Speaking to the Commons liaison committee yesterday, the prime minister claimed that the preponderance of homeowners on multi-year deals was the reason why inflation has been “proving more persistent” than anticipated.
But experts don’t all agree with the PM. Many argue that the UK’s stubborn inflation is due to a combination of factors, many global rather than national, which have been exacerbated by the fact that many economists and central bankers “were late to spot just how big a problem this wave of inflation would prove,” the Financial Times (FT) said.
Critics immediately responded that the prime minister’s comments were not only false, but “tin-eared” in their lack of sympathy for struggling mortgage holders.
Sarah Olney, the Liberal Democrats’ Treasury spokesperson, said: “Homeowners on the brink are facing yet more mortgage misery, while Rishi Sunak’s comments get more tin-eared by the day.
“It shows this Conservative government is just totally out of touch. Conservative ministers sent mortgages spiralling through all their chaos and incompetence. Now they are refusing to lift a finger to help”, Olney said.
What did the papers say?
The reason for inflation’s persistence in the face of aggressive rate rises is down to a “tight labour market, shifting housing market trends and the fragility of the global economy”, said the FT, but it is important to remember that monetary policy “always comes with a lag”, taking around a year and a half for the impact of a single rate increase to “fully seep through into spending patterns and prices”.
Monetary policymakers only began raising rates under a year and a half ago in the US and UK, and under a year ago in the eurozone, the paper said, so it is not surprising that we have yet to see much impact.
Regardless, the UK remains an outlier, said City AM. Britain is now the only rich country where inflation is rising, signalling that the Bank of England’s series of interest rate rises “have been less effective than its peers”, the paper said, citing new data out yesterday.
According to the Organisation for Economic Co-operation and Development (OECD), inflation across G7 nations fell to 4.6% in May, down from 5.4% in April. In the UK, meanwhile, inflation rose to 7.9% in May from 7.8%.
While it is true that most of the world experienced economic fallout from Covid-19 and the war in Ukraine, in the UK “this has been exacerbated by Brexit and 13 years of government austerity measures”, said Open Access Government.
As a result, the scale of the crisis here in Britain is “far worse when compared to most of the OECD countries”, the site said, “and certainly among those in the group of G-7”.
Additionally, there is the prospect of greedflation as “banks, oil companies and many companies in food supply chains are very clearly increasing their absolute levels of profit, and their profit rates,” as interest rates increase, tweeted political economist Richard Murphy.
Murphy’s assessment is that increasing interest rates is in fact an inflationary act with the Bank of England’s assessment appearing to be “based on what economics textbooks say, and the relationship between economics textbooks and reality ceased a long time ago”. Murphy added that a recession now seems to be inevitable as the Bank “has always wanted a recession to control inflation”.
What next?
Numerous economists agree with the prime minister’s suggestion that the effects of the Bank of England’s rate increases are taking longer to feed through to the economy due to the prevalence of homeowners on fixed mortgages rather than floating contracts.
Those who do say we may see inflation turn a corner soon, City AM said, because at the start of 2024 millions of mortgage owners are set to roll on to new deals with much higher rates, which could help bring down inflation by “eroding their spending power”.
There is a further risk that the longer lags from the rate rises,the more the Bank of England is at risk of being “egged on by the markets into raising rates in response to figures that are disappointing”, which could result in “overkill and further damaging the economy, perhaps very seriously”, said David Smith, the economics editor of The Sunday Times.
But the broader problem, not just in Britain but around the world, may simply be that central bankers raised rates too late, said the FT. Their initial insistence that inflation would prove short-lived led to delays which “may have made inflation all the more difficult to vanquish”.
The risk now is that high inflation becomes the norm, according to the Bank for International Settlements (BIS). Claudio Borio, the head of BIS’s monetary and economics unit, warned last year that he was concerned that “inflationary psychology” was setting in.
With inflation remaining stubborn, the future looks bleak, said Jennifer McKeown, chief global economist at Capital Economics. And the ultimate effect will be that higher rates “push most advanced economies into recession in the months ahead”.