“People are paying far too much on their mortgages and there’s only one route to responsibility for this and it’s at Number 10”
That’s what Keir Starmer claimed today in a broadcast interview with journalists.
Let’s take a look.
Why are mortgage rates so high?
Interest is the reward you get for putting your money in a bank account and, conversely, the price you pay for borrowing money. The amount you pay on your mortgage each month is partly determined by the interest rate set by your lender.
That is in turn influenced by the Bank of England “base rate” – the amount it charges other banks to borrow money. The base rate is now at its highest level since the peak of the global financial crisis in October 2008.
Why? Because inflation – which the Bank of England is tasked with keeping at 2 per cent a year – is currently running at 8.7 per cent.
Raising the base rate should, in theory, help to bring inflation back down. The idea is that if borrowing money is more expensive, people will spend less, which reduces demand for goods and services in the economy, encouraging companies to cut their prices to entice cash-strapped consumers. Prices come down – or don’t rise as fast – and inflation starts to ease. On paper, at least.
But raising the base rate is not great news for people on variable mortgages, or those who are about to renew a fixed rate mortgage, because it pushes up their repayment costs.
Is Number 10 to blame for high interest rates?
The Bank of England is independent of the government, so the decision to raise the base rate is not in any prime minister’s control.
Of course, we assume Sir Keir knows this. But in today’s interview he seemed to be making a broader claim – that rates were high because of economic conditions created, or actions taken, by the government.
He didn’t specify which Downing Street resident he had in mind. But it’s true to say that the previous incumbent, Liz Truss, exacerbated inflation last autumn with her ill-fated “mini budget”. The markets lost confidence, the pound lost value, making it more expensive to import goods like food and fuel from abroad, which pushed up prices for customers.
That extra inflation contributed to the Bank’s decision to raise base rates at the time.
But is it fair to lay all of the blame for the current high rates at Number 10’s door?
As the Bank of England says, the key reason inflation is so high (and therefore, the reason base rates have had to rise) is that the UK economy has suffered a “series of significant shocks”.
It says these are the “global supply bottlenecks associated with the aftermath of the pandemic” and Russia’s invasion of Ukraine, which pushed up wholesale gas and grain prices. Both are beyond the government’s control.
Though there are other factors behind UK inflation, some of which the government could have a hand in.
For example, the Bank highlights the “tight labour market” – the fact that nearly everyone who wants a job already has one – which is helping to fuel inflation. When there are fewer people looking for work, employers have to raise wages to fill vacancies, which companies often pass on to consumers in the form of higher prices.
In theory, government policies might tighten or loosen the labour market – so we could place responsibility for the current state of that market with Number 10.
But Sir Keir didn’t mention that the government has also taken steps to reduce inflation – and therefore reduce the need for even higher interest rates – in the form of the Energy Price Guarantee. The government says that by June, this policy will have shaved £1,100 off the average energy bill. Absent the policy, inflation would have been even higher and the pressure on the Bank of England to raise base rates would have been greater.
Ultimately, there are many reasons why inflation – and therefore interest rates – are high. Some of them are within the government’s control, others are not. So, it’s hard to sustain Sir Keir’s claim that blame lies only with the prime minister.
Keir Starmer said that responsibility for mortgage repayments being too high lies solely with Downing Street. It’s fair to say that the previous prime minister, Liz Truss, contributed to the need for inflation-busting high interest rates. Though even then, her policies were one factor among many.
And if we’re talking about Rishi Sunak’s tenure, it’s hard to lay the blame entirely at the government’s door. There are factors within the government’s control, but there are others outside it – for example, the war in Ukraine and post-pandemic supply chain problems – that have contributed to higher inflation, and therefore pushed up interest rates.
The Labour party was contacted for comment.