The Bank of England has made a historic decision, raising interest rates for an unprecedented 12th time in a row, up to 4.5%. This move is driving the cost of living crisis from our energy and supermarket bills to our mortgage rates and sky-high housing costs too.

Let’s consider the story of Becky McLean, a single mum in Yorkshire, who has been struggling with the cost of living crisis. Higher interest rates mean her mortgage payments have almost doubled this summer. Her mortgage used to cost her £700 a month, but now she’ll have to pay over £1300.

Becky is not alone in this. Despite rates going up, most UK homeowners, who have borrowed money on fixed-term mortgages, haven’t felt the pinch yet. But this year, 2.5 million people will be exposed to much higher rates, and 1.7 million of those will come off fixed-rate mortgages, experiencing massive jumps like Becky’s.

The Emotional Toll of Rising Costs

The rising cost of borrowing isn’t just about numbers. It’s about the potential uprooting of lives and the fear of losing one’s home. For Becky, her home isn’t just a house; it’s a place where she’s worked hard to create memories for her little boy. The thought of selling it is gut-wrenching, an echo of the emotional toll this financial stress is causing on many families across the nation.

The Impact of Inflation: An Unseen Enemy

What has happened is that our national income has taken a big hit, a shock, a negative shock, caused by rising import prices and events happening around us externally. This shock gets translated into higher inflation, which in turn reduces our national income.

Inflation is an unseen enemy that we must confront. It’s essential to deal with it because persistent inflation is much worse. It’s not just about mortgage costs. This inflation is concentrated in the essentials of life – food and energy.

Inflation: Hitting the Least Well Off Hardest

Inflation hits those who are least well off hardest. People on lower incomes spend a higher proportion of their income on essentials because, well, they are essential to life. Unless we reduce inflation and bring it back to its target, it will worsen and persist for longer, creating a situation that none of us should want.

In these difficult times, we must remember that individuals like Becky are not just collateral damage in the fight against inflation. We need to be sensitive to their situation, understanding the personal and financial impacts they are experiencing.

As we move forward, it’s crucial to keep these stories in mind and push for solutions that support the most vulnerable in our society.

Impact on Homeowners

The housing crisis of the 1990s was deep and long. It affected almost all homeowners, with an average of 200 homes repossessed every day last year. Back then, mortgages typically changed every time the bank raised rates. This time, the upward march in interest rates represents a massive hit to millions of people.

The Bank of England has taken a gamble that it won’t derail the economy or crash the housing market. However, it does mean that the burden of taming inflation will rest on a much smaller group of people. Despite assurances from the Bank of England that repossessions won’t return to the levels seen in the 90s, the era of cheap money has ended.

We’ve grown accustomed to low rates, and there’s a sense that future rates will return back to where they were before. Unfortunately, that’s not the case. People will struggle. Wages haven’t risen in line with the cost of living, utility bills, and mortgage rates. All these factors will have an impact.

Economic Responses: The Uncertain Path Ahead

Today, the Bank of England delivered the biggest upgrade of growth ever. In February, they projected negative growth for this and next year, and a flat rate in 2025. Now, they’re not predicting any recession, no quarters of negative growth, and cumulatively an extra two and a quarter percent of growth.

However, that’s still quite paltry when talking about growth. For comparison, growth was 2% in 2019, and that wasn’t even high by historic standards.

Inflation, especially in food prices, remains a concern. Food price inflation is currently at about 20%, despite energy prices coming down as the bank had expected. This could potentially lead to a spiral of inflation that the bank is desperate to avoid.

Political Reactions and Future Implications

The politicians weighed in too. The Chancellor, speaking from Japan, emphasized the importance of sticking to the plan to halve inflation to bring certainty back to family finances and stop prices from rising.

The Shadow Chancellor, on the other hand, expressed concerns about the impact of bank policy, highlighting that people have paid a billion pounds more in mortgage repayments compared to where they would have been six months ago.

For homeowners like Becky, the rights and wrongs of economic policy matter less than the frustration she feels about what it means for her family. The sense is growing that things won’t improve for her any time soon.

This sentiment may prove correct, as financial markets are currently betting that there will be yet another rate rise to come before the summer is over.

The bank faced criticism today over their ability to tame inflation, their timing, and even the credibility of the institution. Yet, amidst these uncertainties, one thing remains clear: the decisions made today will have far-reaching implications for homeowners, the economy, and the political landscape. Only time will tell if the right choices have been made.