Households squeezed by energy and mortgage bills

Millions of households face a major squeeze on their finances this year, despite efforts to stop the cost of living crisis from spiralling out of control.

This week Bank Rate rose and the higher energy price cap was announced, pushing up bills for millions of families across Britain.

The Bank of England’s decision was an attempt to soften the impact of the rising cost of living, but further pain lies ahead. Inflation reached 5.4pc in December and officials at the central bank now expect it will peak at 7.25pc in April when the higher energy price cap comes into effect.

The Government has deployed a raft of new measures to help families cope. Chancellor Rishi Sunak announced a new multi-billion package of support, including energy bill rebates and council tax cuts.

But with stagnant wage growth, rising prices, paltry savings rates and incoming tax rises in the spring, many are calling for further support as Britain faces its worst cost of living crisis in a generation.

ENERGY BILLS Electricity and gas bills will soar by £693 a year on average, after the energy regulator Ofgem announced the price cap would rise from to £1,971 in April, a record increase of 54pc.

The change will affect 22 million households that are on default standard variable tariffs, whose bills are subject to the price cap ceiling.

The Government will give a £ 200 subsidy to 28 million households to soften the blow of the cap increasing. However, this will not reach consumers’ pockets until October and will have to be paid back to energy firms over the next five years. This means bills will be £40 higher each year until 2027.

Craig Lowrey, of the consultancy firm Cornwall Insight, said the Government cap on prices, intended to protect consumers from volatility in the wholesale energy market, had been undermined by its persistent rises.

“The cap was never meant to be a permanent solution,” he said. “Rather than protecting customers, the impact in the wholesale market over the past 12 months was simply deferred, leading to this significant increase.”

Mr Lowrey added: “Ultimately what has become clear is if we continue to only play with our outdated system, consumers, suppliers and the wider economy will all pay the price.”

MORTGAGE PAYMENTS On Threadneedle Street, the Bank of England’s Monetary Policy Committee voted to raise the Bank Rate by 0.25 percentage points to 0.5pc, pushing up monthly bills for millions of households with “standard variable rate” and tracker mortgages.

The move is intended to curb inflation by making the cost of borrowing more expensive. This is supposed to encourage more households to save rather than spend their money. But a higher Bank Rate will also drive up homeowners’ mortgage repayments.

Borrowers with £ 200,000 outstanding on their mortgage paying today’s average variable rate of 3.31pc will see their annual costs increase by £492 a year, if banks pass on the 0.25 percentage point rate rise in full.

The Bank Rate is likely to increase even further this year. Four of the nine members of the Monetary Policy Committee wanted to increase the Bank Rate to 0.75pc this week, rather than 0.5pc. Economists expect that interest rates will rise on three further occasions this year. The next decision will be made on March 17.

Steven Bell, chief economist at the asset manager BMO, warned that rates would have to climb higher in order to beat the rising cost of living.

“They would still be below the 2pc inflation target and therefore remain negative in real terms,” he said. “If the Bank of England wants to put downward pressure on inflation, rates will have to rise considerably further.”

COUNCIL TAX CUTS In a bid to push down household costs, Mr Sunak announced the Government will cut council tax for some homes. All properties in bands A to D, equivalent to 80pc of households in England, will be offered a £ 150 reduction in their council tax bill.

In England, the North East, North West, Yorkshire and the Midlands have the highest proportions of properties that are in these bands. But it is unclear how effective the cuts will be in reaching households most in need, since council tax band valuations were last updated in 1991.

Many wealthy people in London and the South East, where house prices have soared in recent decades, also stand to gain.

Richard Neudegg, of the price comparison website Uswitch, said the cut was not enough to help the poorest families who would be hit hardest by rising energy bills.

“It only begins to scratch the surface of the inflationary challenges millions of homes will be confronting,” he said. “The Government risks falling into the same trap of trying to give thin support to everyone instead of focusing on deeper support for those who need it the most.”