The mortgage crisis will have severe political consequences for the Conservative Party

One of the benefits of the Bank of England being operationally independent is that it allows the governor and his colleagues to deliver the kind of message that the politicians find too awkward to verbalise.

The problem sometimes is that, to put it generously, the complexities and contradictions of monetary policy can leave the Bank in a position from which it finds itself transmitting mixed messages. This seems to be the case at the moment.

These are difficult times. Rates on new mortgages are approaching 7 per cent and rising: a bewildering trend in a nation that has long held to a belief in home ownership.

In the Bank’s latest report on the financial stability of the economy, for example, the warnings of pain to come for households (and businesses) are unmistakeable – and alarming. According to the Bank, the average “hit” to household disposable incomes from the increase in interest rates will be about 2 per cent by 2026.

That broad statistic, however, covers all households, not just those with home loans, and thus understates the agonies awaiting borrowers. Those seeking to remortgage over the next few years will be faced with an increase of £500 in their monthly payments. This £6,000 per year increase will affect around a million households by 2026. Taking into account the fact that it will come out of post-tax pay, this equates to an equivalent wage cut of some £10,000 a year. As the Bank’s governor, Andrew Bailey, remarked, “there will be consequences” from tightening monetary policy.

Yet for a long time, the Bank was making much more upbeat noises about our prospects. Indeed, only a couple of days ago, in his Mansion House speech, Mr Bailey also insisted that inflation would “fall markedly” for the rest of the year.

The Bank hasn’t yet revised its central forecast for inflation to fall to 2 per cent by late 2024, and nor has Mr Bailey – a more political animal than he likes to appear – chosen to cast any doubt on the prime minister’s “priority” to cut inflation in half to about 5 per cent by the turn of the year.

Given the long and variable lags in the way that interest rate hikes affect the real economy, the question that inevitably implants itself in the minds of the public – and of professional critics such as Professor David Blanchflower – is why the Bank is apparently so keen to hammer households and induce a recession, if inflation really is set on such a downward trajectory. The danger, in other words, is that it is overdoing it in the short term, and failing to show sufficient forbearance as the economy gradually weakens.

Thus, simply for want of patience, there is a risk of a housing crash and a slump. Because of the modern pattern of mortgage debts, with few of those on variable rates immediately affected, and many more borrowers on fixed rates for longer terms, the impact on household incomes will take longer to feed through than in the past. The Bank knows this – so why the dissonance between the path of inflation and that of interest rates?

Still, Mr Bailey and his team seem determined to do “whatever it takes”, as the phrase goes, and the prime minister and the chancellor are eagerly supporting them. Indeed, so staunch is their apparent commitment that Jeremy Hunt recently hinted that significant tax cuts next spring (in election year) are unlikely: “Bringing down inflation puts more money into people’s pockets than any tax cut.”

Such resolution is also displayed in Rishi Sunak’s reluctance to back the recommendations of the independent pay review bodies that cover public-sector staff such as teachers, doctors, nurses, the police and the armed forces. That break from convention can only intensify industrial unrest and further erode the real-term wages of public-sector workers compared to those of their counterparts in the private sector.

From all this flow two conclusions, one societal and one political.

The first is that the pain of getting inflation down is being felt by all – but much more acutely by some groups than by others. Stereotypically, a couple in their thirties working in the public sector, and with a large mortgage due to be renewed in the coming year or two, will face a sharp fall in their standard of living.

By contrast, an older couple working in the mainstream private sector, with little or no mortgage and some savings, may well find themselves much better insulated from the combined fiscal and monetary squeeze.

A fairer approach would be to make a more progressive fiscal policy – taxes on the better-off – to take more of the strain and moderate the rise in mortgage payments and rents. But that is politically unfeasible, given the current ideological balance of the Tories.

Second, flowing from that, is the political damage that current economic trends will inflict on the government. They are like cruise missiles targeted on swing voters and marginal constituencies. Put bluntly, the Conservatives will probably lose even more ground among moderately well-off voters in their twenties, thirties and forties. This demographic is precisely the one they really need in order to turn the current Labour polling leads around; the wealthy retired will not be sufficient to secure even a minority Tory government in 2024.

There are certainly valuable new, voluntary, measures now in place to slow the cascade of repossessions and evictions, but they won’t mitigate mortgage bills. The grim political consequence of Britain’s economic problems is that 2024 isn’t shaping up to be a year in which the feelgood factor will propel Mr Sunak and the Conservatives to a historic fifth term.