Britain’s chancellor of the exchequer Jeremy Hunt said there were “no easy options” to stabilise the UK economy as the Bank of England raised interest rates by the largest increase since 1989.
The bank hiked rates by 0.75 percentage points to 3 per cent, the highest level in 14 years, ending one of the longest period of low interest rates as it attempts to curb soaring inflation.
It predicted a period of prolonged recession – the longest since records began a century ago – warning that the UK economy would only return to growth in the middle of 2024. The central bank also expects the unemployment rate to rise significantly over the next two years to 6.4 per cent.
Mr Hunt said the rate increase would be “very tough for families with mortgages up and down the country” and “for businesses with loans”.
“The best thing the government can do if we want to bring down these rises in interest rates is to show we are bringing down our debt – families up and down the country have to balance their accounts at home and we must do the same as a government,” he said.
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His remarks were seen as laying the ground for the Tory government’s autumn statement on November 17th when Mr Hunt will set out plans to raise taxes and cut spending to plug the £50 billion (€58 billion) hole in the public finances left after Liz Truss’s short stint as prime minister.
The chancellor blamed runaway inflation – standing at the highest level in 40 years and expected to peak at 11 per cent this winter – as “the enemy”, saying it was “weighing heavily on families, pensioners and businesses”.
Mr Hunt said the “most important thing that the British government can do right now is to restore stability, sort out our public finances and get debt falling so that interest rate rises are kept as low as possible”.
“Sound money and a stable economy are the best ways to deliver lower mortgage rates, more jobs and long-term growth,” he said.
“However, there are no easy options, and we will need to take difficult decision on tax and spending to get there.”
New UK Prime Minister Rishi Sunak and his chancellor are reported to be considering “rough” choices on tax increases and spending cuts with a possible freeze in the thresholds at which people start paying different rates of income tax and national insurance being considered.
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Responding to the Bank of England rate increase, Downing Street said there would be “difficult choices” for the government ahead in what has been seen as another reference to the tax increases and spending cuts expected to be announced later this month.
A Downing Street spokeswoman said it would only be through “sound management of public finances” that the government could provide “long-term economic stability”.
Labour’s shadow chancellor Rachel Reeves criticised the Tory government, saying Mr Sunak should acknowledge the mistakes that have left the UK in a “vicious cycle of stagnation”.
“Families now face higher mortgages and more anxiety after months of economic chaos,” she said, referring to how the rate increase will an add an extra £1,300 a year in borrowing costs to households with the average UK variable-rate mortgage.
“Today’s recession warning lays bare how 12 years of Tory government has weakened the foundations of the economy and left us exposed to shocks, lurching from crisis to crisis with falling living standards and low growth,” said Ms Reeves.
