Hunt urges Bank not to rush rate cuts

Bailey hints that borrowing costs could fall next month in potential boost for Sunak

JEREMY HUNT has urged the Bank of England not to cut interest rates too quickly after Governor Andrew Bailey opened the door to a steep fall in borrowing costs.

The Chancellor intervened after Mr Bailey suggested rates could come down faster than market expectations.

The Bank held borrowing costs at 5.25 per cent yesterday but suggested the first cut might come as soon as next month. Asked if he hoped rates would fall before the general election, Mr Hunt said he “would much rather that they waited until they’re absolutely sure inflation is on a downward trajectory than rush into a decision that they had to reverse at a later stage”.

Stressing that the Bank of England must take its decisions independently, he added: “What we want is sustainably low interest rates, and I think what’s encouraging is that the Bank of England Governor, for the first time, has expressed real optimism that we’re on that path.”

Mr Hunt’s warning stems from fears that the Bank could cause a renewed surge in mortgage costs if it was forced to change course on interest rates. About 1.5 million homeowners are expected to reach the end of fixed-rate mortgage deals in 2024.

It came as Huw Pill, the Bank’s chief economist, said that high levels of immigration were worsening Britain’s housing crisis. He said there had been “quite large increases in immigration into the UK of late” that have led to rising levels of demand for housing.

Investors are pricing in two rate cuts by the end of this year, but now believe there will be a reduction next month after Mr Bailey said rates could fall by more than expected.

A reduction in interest rates would boost Rishi Sunak by easing financial pressures on households. The Prime Minister, who last year fulfilled his pledge to halve inflation, is battling to close a large gap in the polls before an expected autumn election.

Mr Bailey said he was “optimistic” that the era of higher inflation was at an end, although he stressed rate cuts in June were “neither ruled out nor a fait accompli”. The Governor said recent falls in inflation had been “encouraging”,

adding that the Bank believed inflation may already be at its 2 per cent target following a drop in the energy price cap. Inflation stood at 3.2 per cent in March.

He said: “To make sure that inflation stays around the 2 per cent target, it is likely that we will need to cut [the] bank rate over the coming quarters and ... possibly more so than currently pricedin market rates.”

He also said the economy had “turned a corner” as it upgraded its growth forecasts over the next three years. Official figures today are expected to confirm that the economy climbed out of recession at the start of this year.

Mr Pill added that policymakers on Threadneedle Street would consider rate cuts in the “next few meetings”, adding that they would be prepared to lower rates before the US Federal Reserve. However, in a sign that the Monetary Policy Committee (MPC) is becoming increasingly divided, he echoed Mr Hunt’s warning about cutting rates too quickly, adding: “If we give up too early then we will be stuck with inflation away from target for a long time.”

Tensions rose last year after Mr Bailey mistakenly claimed that interest rates may have peaked at 4 per cent. However, stubborn inflation forced rates higher, causing market chaos.

The Bank also said tax cuts in the Spring Budget would lift economic growth over the next few years and encourage more people back to work.

However, the MPC, which sets interest rates, said stronger growth was partly driven by increases in the population, with higher wages in the public sector being the main cause of upgrades to its wage forecasts this year.

Mr Bailey said the next rates decision would be based on new sets of data relating to inflation and the health of the jobs market, adding: “That will help us in making that judgment afresh.”

The Bank’s latest health check of the economy showed Britain bounced back from recession at the start of this year, growing by an estimated 0.4 per cent in the first quarter. It said inflation had probably fallen back to its 2 per cent target in April, from 3.2 per cent in March, adding that food price rises would stabilise for the rest of the year.

HIGH levels of immigration are fuelling Britain’s housing crisis, according to the Bank of England’s chief economist, who blamed skyrocketing rents on a shortage of properties.

Huw Pill said higher interest rates were not responsible for record rises in rental costs, which jumped by 9.2pc in the year to March.

He said “quite large increases in immigration” were piling more pressure on Britain’s housing stock, after net migration hit a record-breaking 745,000 in 2022.

In comments made after the Bank of England held rates at 5.25pc for a sixth consecutive meeting yesterday, Mr Pill said: “The population is growing. To some extent, the rents are really a reflection of supply and demand factors [and] reflect things that aren’t to do with monetary policy.”

A shortage of houses stems from delays in the planning sector, he said, which has long been a source of concern for Britain’s biggest developers.

By arguing that monetary policy is not to blame for the housing crisis, he pushed responsibility towards politicians. He added: “We don’t really build enough houses in this country. And the reason we don’t build enough houses or housing in this country is in large part [because] there’s a lot of issues around planning and so forth.

“So there’s a restraint on supply, which I think probably is not coming from monetary policy, it’s coming from other policy choices. And at the same time that is facing – and increasingly so – in recent times, increasing demand.”

His comments come after Andrew Bailey, the Bank’s Governor, has previously said that higher taxes have forced landlords to sell their properties in the face of higher interest rates.

This has increased financial pressures on tenants by driving up rents.

UK Finance data show the number of buy-to-let mortgages in arrears more than doubled in the first quarter of 2024, compared with the same period a year earlier. Mr Pill admitted that “incentives” for landlords to rent out properties were reduced by higher borrowing costs, but added that higher rates had also made investing in other assets more attractive.

A report by the Centre for Policy Studies this week warned that record levels of immigration had failed to boost the economy, while making the housing crisis worse.

The report, which was backed by former immigration minister Robert Jenrick, said migration now accounted for around 89pc of the 1.34m increase in England’s “housing deficit”. This represents the number of homes the country has underbuilt in the past 10 years.

Mr Pill said the Bank had little influence over housebuilding, as he suggested politicians should do more to build more properties. He said: “I think that the best role we can play is to do our job and let other people do their job. And their job might be, well, should we look again at some of the things that are constraining supply? Should we look at planning regulation? Should we look at building restrictions?

“And this is not a problem that will go away because the drivers of the population are going to be quite consistent.”

The Office for Budget Responsibility, the Government’s tax and spending watchdog, has previously predicted that net migration – the numbers entering the UK minus those leaving – will average 350,000 over the next five years. This is up from a prediction of 290,000 just a few months ago.

This will drive up the total number of adults in the UK from 55m in 2023 to 57m by the end of the decade.

Mr Pill added that rental prices were “a big” driver of domestic inflation.

He said: “We’re very cognisant that rents are growing fast, and they’ve still got a lot of momentum in them, and they haven’t peaked yet.

“And even if they have peaked, they’re at very elevated levels. So we need to bring them down. And that’s part of our job within the overall ambition to get headline inflation back to the 2pc target.”

‘We’re very cognisant rents are growing fast, and they haven’t peaked yet. We need to bring them down’