NOW BRACE FOR PAIN OF THE BIG CRUNCH

Rate rise to 1.25% — and more to come ++ Shock 11% inflation warning ++ But as minister admits Government ‘can’t help everyone’, families are warned:

HOUSEHOLDS face ‘tough times’ as inflation soars and interest rate rises push up mortgage costs, a Cabinet minister admitted yesterday.

and michael Gove warned the Government would not be able to help everyone hit by the ‘painful correction’ that was coming.

The cost of living crunch will cause the bank of england to bump up interest rates still further and push ministers to cut back on spending, he added.

it came as the bank increased interest rates for a record fifth time in a row to a 13-year high of 1.25 per cent – and said it expected inflation to hit 11 per cent this autumn.

mr Gove, the levelling Up secretary, appeared to urge the bank to increase rates further, saying it must ‘squeeze out the inflationary pressures’.

experts are warning that interest rates could hit 3.5 per cent by the end

of next year, piling more pressure on households. Hiking interest rates should cool the red-hot rise in inflation, because it encourages households and businesses to save rather than spend.

But this would also cause the cost of debt to rocket, hurting mortgage holders and other borrowers – including the Government, which is sitting on a debt mountain of more than £2 trillion.

The two million homeowners with variable rate mortgages and the 1.3 million borrowers with fixed deals due to end this year face significant hikes. Laura Suter, personal finance analyst at investment firm A J Bell, said: ‘Someone who locked into record low mortgage rates in recent years would face a real financial shock if they came to refinance that debt today.’ On a gloomy day for the economy:

■ The Bank of England said inflation could prove more persistent amid worries Britain could enter a wage-price spiral;

■ Experts feared the pound would remain weak as the Bank is caught on the back foot in its fight against rising prices;

■ The cost of putting meals on the table for a family of four is set to rise by more than £500 a year.

Mr Gove warned that as borrowing became more expensive, the Government will have to rein in its spending.

‘It is inevitably the case that, when you are squeezing inflation out of the system, you will rely on the Bank of England and the Government having the fiscal and the monetary policies which will inevitably mean we cannot do all the things that we would, in ideal circumstances, like to do.

‘It is an unavoidable consequence of the central bank policies the UK and others have had to follow. There are inevitably tough times ahead for the UK and the global economy.’

He noted that interest rates have been low since the 2008 financial crisis, when they were dropped to encourage spending, adding: ‘It has meant that a correction has to come and that is painful.’

The Bank of England’s monetary policy committee (MPC) yesterday said it was ready to ‘act forcefully’ if cost of living rises get further out of hand.

But it increased the base rate by only 0.25 percentage points, to 1.25 per cent – less than the 0.5 percentage-point lift many had hoped for.

The Bank is grappling with the quandary of whether to act aggressively against the cost of living crunch at the expense of economic growth.

While higher rates could tame rampant inflation, they may also halt Britain’s recovery from the Covid pandemic.

The rise in inflation is exceeding the Bank’s previous expectations. In May, officials said it would peak just above 10 per cent. Now it is expected to top 11 per cent in October – a level not seen in more than 40 years.

Susannah Streeter, of investment platform Hargreaves Lansdown, said: ‘Worries will ratchet up that, given inflation is set to soar to the eye-watering levels of 11 per cent, the Bank of England is going to be seriously behind the curve in attempts to bring it down.’

Andrew Sentance, a former member of the MPC, said: ‘ As expected, the MPC edged interest rates up again but they’re not sending a decisive warning shot to signal they will do what it takes to bring down inflation.’

Laith Khalaf, of A J Bell, said many would take the Bank’s gradual approach to rate increases as a sign that it had ‘bottled it’.