Recently, we have heard much about stubborn inflation, the impact of increasing interest rates - the Bank of England’s favoured measure to control inflation - and their impact on mortgage rates. These are issues which I know many of you - my constituents - are deeply concerned about. It is important that the Government carefully considers policy interventions that avoid unintended consequences.
I was pleased to see the Chancellor’s announcement last week that he has secured a new Mortgage Charter in collaboration with leading lenders to support individuals, worried about the effects of rising mortgage rates on their family finances. It offers vital protections against repossession, safeguards homeowners' credit scores when seeking assistance, and provides families with new tools to manage their monthly payments. Additionally, recognising the disparity between lending and saving rates, the Chancellor has called on banks to pass on the benefits of higher interest rates to savers, rather than solely burdening mortgage payers. This measure has the potential to reduce the impact of higher monthly mortgage payments for many residents in Hastings and Rye.
During my recent visit to Strasbourg, where I represented our country as part of the UK Delegation to the Parliamentary Assembly to the Council of Europe (unrelated to the EU, by the way!), I discussed these issues with MPs from various European countries. High inflation, the cost of living, and interest rates are common concerns across nations, ranging from Azerbaijan to Greenland, Portugal to Finland. It is evident that we are all grappling with similar challenges.
Central banks, including the Bank of England (which has been independent from the Government since 1998) are entrusted to maintain inflation within acceptable limits and may use quantitative easing as a tool. QE involves creating money to purchase government bonds or other financial assets, helping to reduce interest rates and increase money supply. Global central banks implemented QE measures to mitigate the impact of the Covid-19 pandemic. In 2020 alone, the Bank of England purchased £895 billion of UK government bonds to sustain spending and investment levels while economic activity was severely curtailed due to lockdown measures. While QE aims to stimulate spending, it can lead to inflation without a corresponding increase in economic activity, as warned by Rishi Sunak last summer, before assuming the role of Prime Minister. Furthermore, Russia's invasion of Ukraine has exacerbated inflation, particularly impacting food and energy costs. While the Bank of England, like other central banks, is increasing interest rates to curb inflation, it is disappointing that it has been somewhat slow in its response.
Since the Bank of England became independent, the Government's ability to control inflation is limited. However, reducing inflation remains a top priority for this Government, given its adverse effects on economic growth and living standards. This Government supports the Bank of England's measures to combat inflation and acknowledges the importance of avoiding policies that could fuel inflation. For example, while reducing taxes at this time would provide people with extra disposable income, increased spending would drive up demand, increase prices and thereby contribute to inflation. Wage increases have a similar effect, which is why the Government is robust on public sector pay rise restraint.
To mitigate the effects of inflation, the Government is assisting households and businesses by holding energy bills down and providing targeted support with the cost of living. The Government’s comprehensive support with bills and the cost of living amounts to £94 billion in 2022-23 and 2023-24, equivalent to an average of £3,300 per household. This support includes initiatives such as the Household Support Fund; freezes and cuts to fuel and alcohol duty; cost of living payments for those on means-tested benefits, pensioners and the disabled; uprating state pensions and benefits in line with inflation; reducing the universal credit taper rate and providing support for upfront childcare costs for those on universal credit, while also implementing household and business energy support schemes.
Inflation operates like a tax and has a disproportionate impact on the less well-off because they typically spend more of their income on essentials like food and housing. Although it is currently challenging, it is essential that we navigate a responsible path until we successfully eliminate inflation from our economy, ensuring long-term prosperity for all.