Homeowners warned of ‘significant’ rise in UK interest rates | Interest rate

UK homeowners have been warned to prepare for a “significant” interest rate hike from the Bank of England in response to Kwasi Kwarteng’s mini tax cut package last week.

Huw Pill, Threadneedle Street’s chief economist, added to the worries of millions of mortgage payers who have already seen hundreds of home loan products pulled by lenders in anticipation of a sharp rise in the cost of borrowing.

As financial markets signaled that the Bank might need to raise interest rates by up to 6%, Santander, HSBC and Nationwide were among the big lenders signaling the end of cheap mortgages was coming to an end.

About one in 10 transactions have gone missing this week according to online mortgage platform Dashly. On Monday, there were 7,490 residential and rental mortgage products available, but on Tuesday night there were 6,609, down nearly 12%.

The Bank of Ireland, Clydesdale Bank, Post Office Money and a slew of building societies including Monmouthshire, Furness and Darlington were among those to withdraw proceeds.s.

Pill sought to downplay the possibility of an emergency rate hike by the Bank ahead of the next scheduled meeting of its nine-member monetary policy committee in early November.

But he made clear that a significant rise in official interest rates from their current level of 2.25% was in the offing – a move that will affect borrowers on variable rate mortgages and those with fixed rate agreements. fixed end.

“In my view, a combination of the tax announcements we’ve seen will act as a demand stimulus in the economy,” Pill said of the mini-budget. “It’s hard not to draw the conclusion that this will require a meaningful monetary policy response.”

The pound struggled again late in the session, falling below $1.07 against the US dollar amid reports that Kwarteng had to persuade a reluctant Liz Truss to issue a Treasury statement on Monday. intended to counter market chaos.

As well as affecting the pound, the fallout from the mini-budget continued to ripple through other financial markets, with sharp increases in interest rates paid by the government on its debts.

The cost of borrowing over five years was higher for the UK than for Greece or Italy. In another sign of the perceived risk of holding UK assets, the interest rate on 10-year government bonds hit 4.5%, double the rate paid by Germany.

The spread between UK and German bonds was the widest since 1991, while the spike in UK 10-year borrowing costs in recent days was estimated to be the biggest change in gilt yields since 1976, when a run for the pound resulted in a bailout. of the International Monetary Fund.

Pill said the Bank was not “indifferent” to recent movements in UK asset prices. Along with the falling pound and rising bond yields, the FTSE 250 index of UK mid-tier company shares closed last night at its lowest level in almost two years.

Christian Lindner, Germany’s finance minister, joined the long list of policymakers and economists expressing doubts about the Truss government’s attempt to boost growth as the Bank of England hiked interest rates.

“In the UK, a major experiment begins as the state simultaneously puts its foot on the accelerator while the central bank brakes,” Lindner said.

Former US Treasury Secretary Larry Summers has warned that the pound’s respite could be short-lived and that the UK government’s “totally irresponsible” plans could drag the pound below parity against the euro, as well as the dollar.

“The first step to regaining credibility is not to say unbelievable things. I was surprised when the new Chancellor spoke this weekend about the need for even more tax cuts. I don’t see how the Bank of England, knowing the government’s plans, decided to act so timidly.

Virgin Atlantic has urged the government to consider “backtracking” after the mini-budget, with the weaker pound driving up airline costs massively.

Shai Weiss, its chief executive, said the economic situation was “harming consumers” and the airline was deeply concerned, even though it believed its own bookings would hold up.

Kwarteng has dismissed any suggestion he might rethink last week’s package, insisting in a meeting with UK bank officials he was right to announce £45billion in tax cuts , which included the cancellation of the National Insurance contribution increase in April, a drop in the basic income tax rate from 20% to 19% and the abolition of the 45% rate paid by those who earn over £150,000 a year.

“We reacted immediately with an expansionary fiscal policy on energy because we had to. With two exogenous shocks – Covid-19 and Ukraine – we had to intervene. Our 70-year high tax burden was also unsustainable. said the Chancellor to the bankers.

“I am convinced that with our growth plan and the next medium-term budget plan – in close collaboration with the Bank, our approach will work.”

Downing Street has dismissed talk of a split between No 10 and No 11 over how to handle the market reaction to the mini budget and denied there was a row.

However, sources in Whitehall said there were discussions within the Civil Service over a row between the Prime Minister and the Chancellor at Monday morning’s meeting.

Sky News said Truss resisted Kwarteng’s suggestion that a Treasury statement was needed to calm markets.

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