Senior Tories turn on the Bank of England over rates crisis

Senior Tories and economists turned on the Bank of England last night as it prepared to heap more misery on homeowners.

Millions of mortgage holders are braced for interest rates to go up for the 13th time in a row, with some analysts predicting a rise of half a percentage point.

And shock figures yesterday showed inflation stalled at 8.7 per cent in May despite the punishing rate hikes.

Andrea Leadsom, a Tory former Treasury minister, accused the Bank of doing ‘too little, too late’ to rein in surging prices. And a senior adviser to Chancellor Jeremy Hunt said it had ‘misjudged’ the inflationary threat.

Rishi Sunak’s pledge to halve inflation this year is now in jeopardy and government sources yesterday admitted that the ambition to cut taxes this autumn was also at risk. The Prime Minister will today insist that the economic pain will eventually yield results provided we ‘hold our nerve’.

Governor of the Bank of England Andrew Bailey answers questions after speaking at the British Chambers of Commerce Global Annual Conference in London

Naming inflation as the Government’s top economic priority, he added: ‘If we don’t get a grip on inflation now, the damage will be worse and longer lasting.’

But in a highly unusual intervention, Karen Ward, a founder member of the Chancellor’s economic advisory council, said the Bank of England had been ‘too hesitant’ in inflation. She warned failure to nip the problem in the bud might mean the Bank had to ‘create a recession’ to bring inflation under control.

She added: ‘The hope was that this was external factors which would quickly come and go. It is clearly not – our economy is running too hot.’

Adam Posen, a former member of the Bank’s monetary policy committee, said that interest rates might have to rise from 4.5 per cent to 6.5 per cent following its ‘policy errors’.

Tory ex-business secretary Sir Jacob Rees-Mogg said the Bank was ‘inflicting unnecessary pain on the economy because of its earlier failings’.

Dame Andrea said the Bank had made an ‘error’ in continuing to print money through its quantitative easing scheme even as the Covid pandemic was ending. ‘Interest rate rises began too late and were too small,’ she added.

The row came as:

• Mr Hunt hinted that tax cuts would have to be delayed, saying he would not bow to pressure from the Tory Right until inflation was under control;
• Downing Street insisted that the Prime Minister’s pledge to halve inflation this year was ‘on track’;
• Labour accused the PM of imposing a ‘Tory mortgage penalty’;
• National debt soared above 100 per cent of GDP for the first time since 1961, threatening another of Mr Sunak’s key pledges;
• Analysis by the Institute for Fiscal Studies suggested mortgage rate rises could see 1.4million people lose 20 per cent of their disposable income;
• Former chancellor Philip Hammond urged the Government to relax immigration rules to reduce inflationary pressure in the jobs market;
• Former Tory chairman Sir Jake Berry urged the Chancellor to help mortgage holders to avoid ‘mass evictions’;
• House prices could fall by a quarter if interest rates go to 6 per cent and remain there for several years, experts predicted.

Official figures showed inflation remained at a stubbornly high 8.7 per cent in May, the same as the previous month. It had been expected to fall to around 8.4 per cent. To hit Mr Sunak’s target it will have to be slashed to no more than 5.4 per cent by the end of the year.

In a development that spooked markets, core inflation, which strips out volatile factors such as food and energy, actually rose from 6.8 per cent to 7.1 per cent, driven in part by rising wages.

Mr Sunak, who will hold a question and answer session with voters today, insisted inflation would be brought under control. In a statement last night, he said: ‘I feel a deep moral responsibility to make sure the money you earn holds its value.

The headline CPI came in at 8.7 per cent in May, the same as the figure for April – defying hopes of a fal 

‘That’s why our number one priority is to halve inflation this year and get back to the target of 2 per cent.

‘And I’m completely confident that if we hold our nerve, we can do so.’

The Bank has a legal duty to act to keep inflation at 2 per cent. But critics say it took its eye off the ball as the global economy recovered from the pandemic.

A Treasury spokesman said Ms Ward, chief market strategist at JP Morgan Asset Management, had been speaking in a personal capacity and insisted the Chancellor remained in lockstep with Andrew Bailey, the Bank’s under-pressure governor.

‘The Government supports whatever action is deemed necessary by the Bank to tame inflation,’ the spokesman said. ‘Inflation is the ultimate destabilising force slowing growth in the UK economy.’

Financial website Moneyfacts said the average rate on a two-year fixed mortgage had risen to 6.15 per cent while five-year deals climbed to 5.79 per cent.