Jeremy Hunt, UK chancellor, has ruled out giving any direct fiscal support to households struggling with soaring mortgage costs, even though the issue could hit Conservative prospects in the run-up to the next general election.
Hunt has concluded that such an intervention would drive up government borrowing and fuel inflationary pressure, causing the Bank of England to put up interest rates even higher, Treasury sources said.
Instead, Hunt’s allies said the chancellor would work with the banks to “live up to their responsibilities” to help mortgage borrowers who are finding it tough to meet their monthly payments.
Michael Gove, cabinet minister for housing, said ministers would “keep under review” support for households, amid warnings that average mortgage payments for people coming off fixed-rate mortgage deals in 2024 could rise by an average of £2,900 a year.
But Gove told the BBC’s Sunday with Laura Kuenssberg that money to address the steep rise in mortgage rates could not be “managed from thin air” and added: “We have to be careful.”
He said that adding to the stock of government debt would put pressure on interest rates and the markets wanted to be reassured about the “safety and durability” of the British economy.
The Resolution Foundation think-tank said last week that the UK had a worse inflation problem than other countries and that the BoE would need to raise interest rates to almost 6 per cent next year, when a general election is expected.
The BoE’s monetary policy committee will meet on Thursday, when it is expected to announce a 13th consecutive rise on the current rate of 4.5 per cent. A quarter-point rise to 4.75 per cent would represent a 15-year high.
Hunt, who is under pressure from Tory MPs to cut taxes before the election, has little fiscal room for manoeuvre. Even if he could afford a bailout of mortgage holders — as proposed by the Liberal Democrats — he believes it would be disastrous economically.
A Treasury source said: “Borrowing money to subsidise mortgages risks fuelling inflation further, forcing the BoE to respond with higher interest rates. It would be totally self-defeating.”
Instead, Hunt is looking to work with banks to try to limit the impact of higher mortgage rates, which will exacerbate the UK’s already acute cost of living crisis and the financial hardship faced by many families.
The Treasury said it was in regular contact with banks “to understand their position and current lending conditions”; Hunt convened a meeting with lenders to discuss the mortgage situation in December.
“The chancellor made clear his expectation that lenders should live up to their responsibilities and support any mortgage borrowers who are finding it tough right now,” said one Hunt ally.
BoE governor Andrew Bailey said last week that inflation was “taking a lot longer” than hoped to come down, and a central bank survey found that public confidence in its ability to control inflation had fallen to its lowest level since records began.
The Resolution Foundation estimated in a report that 1.6mn fixed-rate mortgages are due to expire in 2024.