Inf lation? Blame fixed-rate home loans, says Rishi
THE popularity of fixed- rate mortgages is hampering the fight against inflation, Rishi Sunak said yesterday.
Desperate homeowners have been switching to fixed-rate deals over the past year to protect themselves from soaring interest rates.
But the Prime Minister warned that the trend is making it tougher to bring down inflation, potentially leading to interest rates having to stay higher for longer.
He told MPs the numbers of homeowners on fixed-rate mortgages meant the ‘transmission’ of economic pain from interest rate rises was ‘slower than in the past’.
At the turn of the century three-quarters of homeowners had variable rate mortgages, meaning they felt the impact of rising Bank of England rates immediately.
But now three-quarters of homeowners are on fixed-rate deals where they do not feel the impact until their term ends, months or even years down the line. More than 95 per cent of borrowers taking out a mortgage since 2019 have opted for a ‘fix’.
The PM told the Commons liaison committee: ‘The transmission mechanism (is) perhaps slower when it comes to mortgages than it has been in the past because of the preponderance of people to have fixed-rate mortgages now.’ He said the Bank of England was aware of the issue. And he stressed that interest rates impact the ‘real economy’ in other ways, such as through business investment.
But he said the stubborn nature of inflation meant Britain would have to ‘stick to the course’, including accepting the monetary policy pursued by the Bank, which has raised interest rates 13 months in a row in its attempts to curb inflation.
Mr Sunak acknowledged that soaring interest rates were causing ‘difficulty’ for some, but added: ‘Inflation is proving more persistent than people anticipated but that doesn’t mean that the plans and the policy options that have been deployed are the wrong ones, indeed they are the right ones.
‘Whether that’s monetary policy, responsible fiscal policy or supply side reform, that’s the right toolkit you need to deploy to get inflation down. We just need to stick to the course. That’s not easy – it involves difficult decisions – but if we don’t do that inflation will just get worse and last for longer and that doesn’t help anybody.’
The PM declined to put a percentage on his chances of achieving his target of halving inflation this year, saying: ‘I don’t have one for you. I am working 100 per cent to deliver it and we will keep doing that.
‘That is all I can do is just keep throwing everything at it.’
He said the Government would continue to keep putting pressure on public spending, including ‘making sure our approach to public sector pay is responsible’.
Speaking on the six-month anniversary of his five pledges, the PM insisted the Government was making progress on his goals.
He denied that the pledge to ‘stop the boats’ had been ‘put on hold’ until the Supreme Court considers the legality of plans to deport Channel migrants to Rwanda. ‘The court will have to determine its own ruling and that’s outside the Government’s hands,’ he said. ‘But in the meantime we can get on with a range of other things.’ In a wide-ranging evidence session, the PM also talked up the potential for artificial intelligence to transform both the economy and society.
He suggested robots powered by AI could be deployed as personal tutors in school, potentially having a ‘transformational’ impact on the prospects of struggling pupils.
And he highlighted forecasts suggesting efficiency gains driven by AI could boost Britain’s GDP in the coming years, as well as finding treatments for conditions such as dementia and cancer. ‘In public services, health and education are the two areas where I’m most excited,’ he said. But the PM acknowledged potential threats posed by AI, adding that the Government was working with allies to develop ‘guard rails’ to prevent the misuse of the technology, which some experts warn could wipe out mankind.
‘We need to stick to the course’