Inflation news – live: Fears of ‘shock-and-awe’ Bank of England hike as mortgage rates climb

Gloomy new inflation figures have raised market fears of a “shock-and-awe” interest rate hike of 0.5 per cent by the Bank of England on Thursday, spelling further pain for homeowners with mortgages.

Inflation unexpectedly remained frozen last month on 8.7 per cent, the Office for National Statistics said on Wednesday morning, with core inflation – which excludes items such as food and energy – hitting its highest level for 31 years.

As a result, markets are now betting more heavily that the central bank will push its base rate to 5 per cent this week instead of a less severe move to 4.75, with chancellor Jeremy Hunt saying that government “will not hesitate in our resolve to support the Bank as it seeks to squeeze inflation”.

With these worsened expectations yet to be priced into existing mortgage deals, Moneyfacts figures showed the average rate of a two-year fixed deal had already risen to 6.19 per cent on Wednesday – up from the 6.01 figure which prompted warnings of a “mortgage disaster” on Monday.

Key Points

• Inflation remains frozen on 8.7 per cent ahead of Bank of England interest rates decision

• Speculation mounts over ‘shock-and-awe’ 0.5% base rate increase tomorrow

• Gilt yields: Cost of government borrowing hits new 15-year high, above Truss spike

• ‘Hesitant’ Bank of England ‘needs to create a recession’, says government adviser

• Inflation at highest levels in 31 years, ONS chief economist warns

• Chancellor insists government won’t be ‘pushed off course’ in goal to curb inflation

14:46 , Katy Clifton

Thanks for following our live update, we are pausing our coverage for the afternoon.

SNP claims Sunak took ‘honesty lessons’ from Boris Johnson

14:35 , Jane Dalton

The prime minister has taken his “honesty lessons from Boris Johnson”, the SNP has suggested.

The party’s Westminster leader Stephen Flynn questioned Rishi Sunak’s “economic optimism” over recent months.

Consumer Prices Index inflation stayed at 8.7% in May, the same as in April, despite experts forecasting a fall to 8.4%.

The Office for National Statistics meanwhile said the increase in food prices slowed from 19.1% in April to 18.4% in May.

In the Commons, Mr Flynn said: “In February the Prime Minister told this here House that borrowing costs are back to where they should be, in March he boasted we are on track to halve inflation by the end of the year, and in May he then said economic optimism is increasing.

“Given the dire economic reality of today, is it not now clear that he has taken his honesty lessons from Boris Johnson?”

Rishi Sunak replied: “He also failed to mention that not just the Bank of England, not just the OBR, not just the OECD, but also the IMF, all of them have upgraded their growth outlook for the United Kingdom economy this year.

“Whilst he and others were predicting this country would enter a recession, the actions of this Government have meant that we have so far averted that, and we continue to be on track to keep reducing inflation because that is the right economic priority.”

Commons Speaker Sir Lindsay Hoyle warned Mr Flynn to be a “little bit more cautious” and not imply Mr Sunak had intentionally misled MPs.

Sunak still on course to fulfil inflation pledge, No 10 insists

14:07 , Andy Gregory

Downing Street has insisted Rishi Sunak is still on course to fulfil his pledge of halving inflation by the end of the year despite it remaining stubbornly high.

The prime minister’s official spokesperson said: “That remains the target.”

Asked if they are on track to fulfil the promise, they added: “Yes. Despite some of the coverage at the time [of the announcement of the pledge] this was never something that was straightforward. It was rightly an ambitious target that we remain committed to and it can only be achieved with fiscal discipline.”

Why is inflation so high?

13:50 , Andy Gregory

Today’s gloomy figures show that inflation struck 8.7 per cent in May, still considerably down from the 11.1 per cent peak it hit late last year but now stagnant since April.

Prices rocketed after the Russian invasion of Ukraine last February caused the price of energy to shoot higher, adding to pressure from supply disruption.

It contributed to higher costs for firms making products or offering services, while labour costs also started to rise.

Since then, higher food and drink prices are a key reason why inflation has failed to fall as fast as hoped. Olive oil, eggs and cheese are among items to see the sharpest increases over the past year.

However, according to the ONS, core inflation – which excludes items such as food and energy – is also at its highest level for 31 years.

Martin Lewis visits No 11

13:33 , Andy Gregory

Consumer champion Martin Lewis has been at Downing Street today to meet with chancellor Jeremy Hunt.

Tory MP insists people should be ‘talking Britain up'

13:16 , Andy Gregory

Despite today’s dire economic figures, a Tory former cabinet minister has claimed that it is “time “we heard more good news, talking Britain up”.

Dr Liam Fox told PMQs: “Since 2016, cumulative growth in Italy has been 4 per cent, in Germany has been 5.5 per cent, in the UK has been 6.8 per cent.

“In May last year, British exports to the European Union were not just the highest since Brexit but since records began. The UK had the highest growth of any G7 country in both 2021 and 2022. The eurozone is currently in recession, we are not. Is it not time we heard more good news, talking Britain up?”

Rishi Sunak replied: “He is quite right to highlight the improvement in our economic outlook and he is right to highlight the good, positive news showing the strength in the underlying economy. I know that he joins with me in saying that our economic priority right now must be to continue to bear down on inflation.

“But while we do that, we are putting the conditions in place to grow this economy. As he said, unlike the party opposite we won’t talk Britain down, we will grow the country’s jobs.”

Sunak accuses Starmer of ‘dangerous, inflationary’ policies as he is challenged on mortgage rises

13:00 , Andy Gregory

Speaking at PMQs, Labour leader Sir Keir Starmer challenged Rishi Sunak on mortgage rises, asking: “How is an extra £2,900 a year on repayment delivering for homeowners?”

He said: “The question he refuses to answer, he actually knows the answer to this question, is £2,900 extra. That’s the cost to the average family of the Tory mortgage penalty.

“Now he was warned by experts about this as long ago as autumn last year, but he either didn’t get it, didn’t believe it or didn’t care because he certainly didn’t do anything, and when I raised this a couple of months ago, he had the gall to stand at that despatch box and say he was delivering for homeowners. How is an extra £2,900 a year on repayment delivering for homeowners?”

The PM replied: “Perhaps [he] could explain why interest rates are at similar levels in the US, in Canada, in Australia and New Zealand, why they’re at the highest level in Europe that they’ve been for two decades.

“That’s why it’s important that we have a plan to reduce inflation, but in contrast what do we hear from (him). He wants to borrow an extra £28bn a year, that would make the situation worse .... He doesn’t have many policies, but the few that he does have all have the same thing in common, they’re dangerous, inflationary and working people would pay the price.”

Analysis | This has been Rishi Sunak’s worst month as prime minister

12:56 , Andy Gregory

Our columnist Andrew Grice writes:

Today's worse than expected inflation figures are grim for the government and will increase the pressure on the Bank of England to raise interest rates tomorrow, therefore compounding the mortgage crisis.

With the cost of a two-year fixed rate mortgage now above six per cent, Conservative MPs are increasingly jittery about the political impact of higher payments home buyers. The penny has dropped that the pain is going to last until the general election – whenever Rishi Sunak calls it.

Sunak is not only haunted by Boris Johnson. The mortgage crisis shows he is also struggling to move on from the disastrous Liz Truss regime. Memories of that make it easier for Labour to hang the mortgage crisis round the Tories’ necks rather than allow them to blame external events beyond their control like war in Ukraine.

The inflation figures are another black spot in what is becoming Sunak’s cruellest month as PM. They will supplant headlines about Johnson and Partygate – but only with grim economic news.

This has been Rishi Sunak’s worst month as prime minister | Andrew Grice

Starmer attacks Sunak over ‘mortgages catastrophe'

12:31 , Andy Gregory

Labour leader Sir Keir Starmer has attacked Tory policies as to blame for the “mortgage catastrophe”, as he confronted Rishi Sunak at PMQs.

In a reference to Mr Sunak’s absence over the vote to condemn Boris Johnson, Sir Keir told the Commons: “I realise the prime minister spent all week saying he doesn’t want to influence anyone or anything. He is certainly keeping to that with his answer.

“He knows very well the cause of the mortgage catastrophe - 13 years of economic failure and a Tory kamikaze budget which crashed the economy and put mortgages through the roof.

“So, will the prime minister tell us how much the Tory mortgage penalty is going to cost the average homeowner?”

Mr Sunak replied: “The honourable gentleman isn’t aware of the global macroeconomic situation.”

He added: “We have deliberately and proactively increased the generosity of our support for the mortgage interest scheme, we have also established a new FCA (Financial Conduct Authority) ... duty which will protect people with mortgages, for example moving them onto interest-only mortgages or lengthening mortgage terms.

“We have spent tens of billions of pounds supporting people with the cost of living, particularly the most vulnerable.”

Watch: Hunt vows to follow Tory plan to battle inflation ‘no matter the pressure’

12:22 , Andy Gregory

Government borrowing could overshoot OBR forecasts by £20bn, claims analyst

12:10 , Andy Gregory

Expectations of higher interest rates could see government borrowing overshoot the Office for Budget Responsibility’s forecasts by as much as £20bn, one analyst has warned.

In remarks after the cost of government borrowing on two-year gilts hit a new 15-year high, chief economic adviser to the EY Item Club, Martin Beck, said: “At the next fiscal event in the autumn, the official forecaster will likely deem the government in breach of its fiscal rules based on current policy.

“The chancellor would likely respond by adding more post-election spending cuts on top of a spending squeeze that already looks challenging. So the true medium-term path for fiscal policy is unlikely to emerge until the first Budget after the election.”

Bank of England will be cagier about future rates than last November, says analyst

11:54 , Andy Gregory

Bank of England officials “will be reluctant to offer any firm guidance” on future rates in case of “further inflation surprises”, one analyst has suggested.

ING developed markets economist James Smith said: “It’s another month where UK inflation has come in dramatically higher than expected and that all but guarantees another rate hike from the Bank of England tomorrow.

“When rates got this high last November, the Bank of England offered some rare pushback against market expectations and signalled a lower peak for rates.

“This time, with inflation consistently coming in hotter than expected, we suspect officials will be more reluctant to offer any firm guidance on what comes next.

“Policymakers won’t want to steer market rate expectations lower, only to find that further inflation surprises force it to go further than it would like over the coming months.”

Average house prices in April were £9,000 higher than previous year, ONS finds

11:13 , Andy Gregory

Annual house price growth is running at around one quarter of the rate seen last summer, according to the Office for National Statistics.

At £286,000, the average UK house price in April this year was £7,000 below a recent peak in September 2022, with house prices having increased by 3.5 per cent on average in the 12 months to April, according to the ONS – down from a peak of 14.2 per cent in July 2022.

Volatility in the figures for 2021 and 2022 reflects house price movements around changes in stamp duty in 2021, the ONS said.

The annual increase in property values also slowed in April compared with the previous month, when a 4.1 per cent rise was recorded. The average UK house price in April 2023 was £9,000 higher than 12 months earlier.

‘Shock-and-awe 0.5% rise’ cannot be ruled out, says analyst

10:47 , Andy Gregory

A “shock-and-awe” rise of 0.5 per cent in the Bank of England’s base rate tomorrow cannot be ruled out, an analyst has warned, with markets as of this morning viewing such a move as more likely than a smaller increase of 0.25 (see post at 9:05am).

Rob Morgan, chief investment analyst at Charles Stanley, said: “With prices showing little response to the Bank of England’s twelve successive interest rate rises, today’s figures seal a further increase in interest rates at the Monetary Policy Committee’s next meeting tomorrow from the current level of 4.5 per cent.

“An increase to 4.75 per cent is all but nailed on, but a shock-and-awe rise of 0.5 per cent to 5 per cent cannot be ruled out. The Bank of England will likely maintain tight policy for the remainder of the year, meaning further interest rate rises and no significant rate cuts until 2024.”

Average mortgage rates continue to rise

12:20 , Andy Gregory

Mortgage rates have continued to rise today, figures suggest, even without this morning’s gloomy expectations of a further rise in the Bank of England’s base rate.

According to figures from Moneyfactscompare.co.uk released on Wednesday, the average two-year fixed residential mortgage rate is 6.15 per cent and the average five-year fixed residential mortgage rate is 5.79 per cent.

There were 4,498 residential mortgage products available on Wednesday. This is down from a total of 4,641 on Tuesday, Moneyfacts said.

Here was the outlook from mortgage brokers on Monday, when the average rate of a two-year fix was at 6.01 per cent:

UK ‘hurtling into mortgage disaster’ as rates near highs seen during Truss turmoil

Watch: Government 'sticking to its guns', says Jeremy Hunt despite frozen inflation

10:20 , Andy Gregory

Interest owed on government debt in May was £700m above watchdog’s forecast

10:10 , Andy Gregory

This morning’s ONS figures also revealed that the interest payable on central government debt was £7.7bn in May – which is £200m less than a year ago, but £700m more than forecast by the Office for Budget Responsibility (OBR).

Borrowing in the first two months of the financial year so far has already reached £42.9bn – £19.6bn more than in the same two-month period a year ago and £2.1bn higher than the £40.8bn predicted by the OBR.

But the ONS said it has revised down its estimate for borrowing in the previous financial year to March 2023 by £3 billion to £134.1bn. This is still £11.8bn more than in 2021-22 and remains the fourth highest borrowing figure since monthly records began.

You can read more details here:

UK debt exceeds 100% of GDP for first time since 1961 – ONS

UK debt exceeds 100% of GDP for first time since 1961

10:05 , Andy Gregory

The UK’s debt pile reached more than 100 per cent of economic output for the first time since 1961 as government borrowing more than doubled in May, this morning’s figures suggest.

The Office for National Statistics said net debt reached £2.6 trillion as of the end of May, estimated at 100.1 per cent of GDP, having shot up from around 84 per cent as the government responded to the coronavirus pandemic in March 2020.

Samuel Tombs, of the Pantheon Macroeconomics consultancy suggests that “pre-election tax cuts no longer look feasible”.

Bank of England ‘needs to create a recession’, says government adviser

10:00 , Andy Gregory

A member of chancellor Jeremy Hunt’s economic advisory council has claimed that the Bank of England has “been too hesitant” about raising interest rates and needs to “create a recession” to curb inflation.

JP Morgan’s Karen Ward told BBC Radio 4’s Today programme there are “certainly signs” that a price-wage spiral is emerging, which the central bank “has to nip in the bud”.

“The difficulty for the Bank of England – I mean, no-one envies them their job at the moment – is they have to therefore create a recession.

“They have to create uncertainty and frailty, because it’s only when companies feel nervous about the future that they will think ‘Well, maybe I won’t put through that price rise’, or workers, when they’re a little bit less confident about their job, think ‘Oh, I won’t push my boss for that higher pay’. It’s that weakness in activity which eventually gets rid of inflation.”

Two-year gilt yields hit new 15-year high as cost of government borrowing increases

09:25 , Andy Gregory

The amount the government pays to borrow has surged following the publication of ONS figures suggesting inflation proved more persistent than expected.

The interest rate for two-year gilts peaked at a fresh 15-year high of nearly 5.09 per cent, considerably above the peak of 4.8 per cent hit during the Liz Truss mini-Budget meltdown last September.

Gilts are essentially IOUs issued by the Treasury when it wants to borrow money.

Longer-term gilts also rose during the morning.

Speculation mounts over 0.5% increase in Bank rate

09:05 , Andy Gregory

Today’s disappointing inflation figures have prompted mounting speculation that the Bank of England could hike its base rate by 0.5 per cent tomorrow – leaving it at 5 per cent.

While most previously expected the bank to raise rates by 0.25 per cent this time, Refinitiv data reported by ITV’s Joel Hills showing that the markets now believe the larger rise is more likely, and are betting on rates nearing 6 per cent by end of year.

Journalist Robert Peston also warned that “there is a serious risk that interest rates will be lifted tomorrow by 0.5 per cent”, double the size of the two most recent rises, as he added: “There has been a massive policy failure in the UK. The reputation of the Bank of England is in serious jeopardy.”

Chris Burn of the Yorkshire Post said he expects such a move “will be a political disaster for the Tories”, adding: “Not just more economic pain for millions but a clear signal to voters the government’s strategy to cut inflation so far isn’t working.”

Tories’ blue wall constituencies to be hit by mortgages ‘time bomb’

08:48 , Andy Gregory

Our political correspondent Adam Forrest reports:

Rishi Sunak is vulnerable to a wipeout in the Tories’ “blue wall” seats in the south of England over a backlash from mortgage holders hit by soaring borrowing costs, new Labour analysis suggests.

Constituencies in the south-east are set to feel the worst of the pain from rising interest rates, with chancellor Jeremy Hunt facing a fight to hold onto his own seat in Surrey.

The most vulnerable areas to crippling re-mortgaging rates are largely concentrated in the south-east, according to Labour’s analysis. There are 11,600 mortgage holders in Mr Hunt’s own South West Surrey seat, with families in the area facing an average increase of £5,600 a year on their housing costs.

Tories faces ‘blue wall’ wipeout from mortgage time bomb

Hiking base rate ‘will do little to address inflationary pressures'

08:40 , Andy Gregory

Further hiking the Bank of England base rate “will do little to address current inflationary pressures”, an accountancy body has warned.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said: “While core inflation is proving troublesome, the painful squeeze on consumer spending from soaring mortgage costs and higher taxes should soon put it on a downward path.

“Although another interest rate rise on Thursday looks inescapable, further tightening will do little to address current inflationary pressures and instead risks deepening the financial pain facing people and businesses.”

Another Bank base rate rise now ‘a nailed-on certainty’

08:29 , Andy Gregory

Another rise in the Bank of England base rate “is a nailed-on certainty”, one mortgage broker has suggested, urging governors to “pause for thought” before “inflicting real harm”.

Andrew Montlake, managing director of Coreco mortgage brokers, said: "The latest inflation data is set to upset an awful lot of people, leading to a new set of rates rises that will compound the pain of a cost-of-living crisis on the public."

He added: “The Bank have one job to do, and it is painfully clear that the tool they are currently using is a blunted instrument against inflation that is now endemic.

“Rather than keep doing the same thing, they should pause for thought and look at a different approach before they inflict real harm in the economy and on people’s livelihoods.”

‘Tory government can’t get a grip of this’: Shadow chancellor Rachel Reeves responds

08:10 , Maryam Zakir-Hussain

Shadow chancellor Rachel Reeves said: “This Tory government can’t get a grip of this problem because they are the problem.

“Thirteen years of the Tories and their disastrous mini-budget are damaging our economic security and leaving families worse off.

“Simply continuing on this Tory path of managed decline is not the summit of Labour’s ambition.

“We need a more secure economy, more secure family finances and a plan to help us grab hold of the opportunities before us.

“With a relentless focus on the cost of living, our strong fiscal rules and our mission for growth, that is what a Labour government will bring.”

Chancellor insists government won’t be ‘pushed off course’ in goal to curb inflation

08:06 , Maryam Zakir-Hussain

Chancellor Jeremy Hunt said the government would “stick to its guns” and insisted patience was needed for Bank of England rate rises to curb inflation.

He told broadcasters: “Today’s figures strengthen the case for the government to stick to its guns.

“No matter what the pressure from left, right or centre, we won’t be pushed off course.

“Because if we are going to help families, if we are going to relieve the pressure on people with mortgages, on businesses, we need to squeeze every last drop of high inflation out of the economy.”

He added: “If you look at what’s happening in other countries, you can see that rises in interest rates do bring down inflation over time.

“That will happen here but we need to be patient, we need to stick to the course and then we’ll get to the other side.”

08:01 , Maryam Zakir-Hussain

Chancellor Jeremy Hunt said the government was taking “difficult decisions” to balance the books following the pandemic and Vladimir Putin’s invasion of Ukraine.

“We rightly spent billions to protect families and businesses from the worst impacts of the pandemic and Putin’s energy crisis,” the chancellor said.

“But it would be manifestly unfair to leave future generations with a tab they cannot repay.

“That’s why we have taken difficult but necessary decisions to balance the books in order to halve inflation this year, grow the economy and reduce debt.”

Government borrowed more than doubled in May, official figures show

08:01 , Maryam Zakir-Hussain

Government borrowing more than doubled to £20 billion in May, pushed higher by the cost of mammoth energy support schemes, while public sector net debt reached more than 100% of annual economic output for the first time since 1961, according to official figures.

The Office for National Statistics (ONS) said borrowing in May was £10.7 billion higher than a year ago and the second-highest May borrowing since monthly records began in 1993.

Economists had predicted borrowing of £19.5 billion for May.

The ONS data also showed net debt reached £2.6 trillion as of the end of May, estimated at 100.1% of gross domestic product (GDP).

This is the first time the debt-to-GDP ration has risen above 100% since March 1961, except for during the pandemic, but this was later revised lower.

Inflation at highest levels in 31 years, ONS chief economist warns

07:59 , Maryam Zakir-Hussain

Core inflation is at its highest level in 31 years, the Office for National Statistics’ chief economist has said.

Grant Fitzner told BBC Radio 4’s Today programme: “I think something that may cause some concern is the continuing rise in what’s known as core inflation - that excludes food, energy, alcohol and tobacco - which has risen in the latest month to 7.1%.

“That’s the highest annual rate in core inflation since March 1992.”

He added: “Goods inflation, of course, has seen big increases over the past year but it’s been gradually heading downwards. Where we’re seeing the increase over recent months has been in service prices, so cafes, restaurants, hotels, etc.

“In the latest month that rose to 7.4%. That is the highest again for quite some time and it’s probably driven at least in part by the increase we’ve seen in wages.

“Service prices are sticky, it can take longer for them to pick up, but likewise longer for them to unwind as well. Certainly, a number of commentators have pointed to some concerns that this means that inflation may be a little bit stickier on the way down than people had previously expected.”

Inflation remains frozen on 8.7 per cent ahead of Bank decision on interest rates

07:58 , Maryam Zakir-Hussain

Inflation unexpectedly remained frozen last month on 8.7 per cent, pilling further pressure on the Bank of England to raise interest rates.

Following two consecutive months of falls, rising prices remained the same in April and May and above what economists had predicted earlier in the year.

The Office for National Statistics said rising prices for plane tickets, recreational and cultural goods and services and second-hand cars added the most to inflation.

Costs for motor fuel fell, the ONS said, putting the biggest downward pressures on inflation.

Inflation stays frozen ahead of Bank decision on interest rates