The surprise would have been if it had not happened. As a result, the markets – political markets as well as financial ones – were able to greet this week’s 0.25% increase in the cost of borrowing with something resembling a collective shrug of the shoulders. This 14th successive rise, taking UK base interest rates to 5.25%, had been largely priced in. A 15th is widely expected, so the price of money for businesses and mortgage holders is likely to go on rising to levels that have not been seen since before the financial crisis of 2008.
Ordinary borrowers are unlikely to be so phlegmatic. More than 1.4 million people hold variable rate mortgages. For them, the latest rise twists the screw even more tightly, piling on fresh costs to the hundreds of pounds that have been added to their monthly bills since rates began their steep climb from that distant 0.1% rate that still applied at the start of last year. Do not forget the additional deterrent effect of all this, not just in discouraging new customers from taking out new mortgages but also in the inevitable knock-on consequences for an increasingly sluggish construction sector.
For businesses in several other sectors, the Bank of England’s new normal is also proving brutal. Businesses with less money in the bank are more exposed by rising rates. For them and for others, there is no disguising the continuing dangers lurking near the surface of the economy. Insolvencies are running at 40% higher than a year ago. The fatal combination of rising prices and higher borrowing costs has inescapably hit consumer spending, as the homeware retailer Wilko has become one of the latest to discover.
Inflation may be slowing now, but the UK rate in June was still 7.9%. That is four times the inflation rate in Belgium and Spain, and significantly higher than the rates in France and the wider eurozone. Britain’s rate may fall again later this month. Yet with the Bank reiterating this week that its goal remains to return to sustainable 2% inflation, there is plenty of scope for the restrictions on borrowing to grow and to remain in force for a long time.
In the medium term, Britain is now facing both an economic and a political race against time. The Bank’s language means that there may be no early cut in rates, even if inflation declines – and remember that the Bank’s forecasting record on such matters is so bad that the former Federal Reserve chair Ben Bernanke has been brought in to discover what is wrong.
Wilko’s decision to go into administration risks up to 12,000 jobs in the company and its supply chains. And retail is not alone. According to the Resolution Foundation, the price to be paid for the anti-inflation strategy could be 350,000 more lost jobs.
Politically, the race against time is to see whether some form of economic stabilisation can be established before the need for a general election. Things are not looking good here either. If the Bank is correct to warn that borrowing costs will remain high for at least two more years, then Rishi Sunak will struggle to fulfil at least three of his five pre-election pledges on inflation, growth and debt reduction. With this tightening, the narrow path to electoral victory about which the cabinet was briefed at Chequers in January looks even narrower than before.
