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

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.”

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.

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 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.”

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 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.”

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 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.

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 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.