Social Justice

Interest rates rise will 'fuel the fire' of the cost of living crisis

Charities and experts warn that the Bank of England interest rates rise could lead to "widespread debt" for vulnerable people

bank of england interest rates

The Bank of England has increased interest rates to 4.5 per cent. Image: Unsplash

People could face “unmanageable debt” for years to come as the Bank of England raises interest rates, charities and experts have warned. 

The Bank has increased the base rate from 4.25 per cent to 4.5 per cent. This is the highest level since the height of the global financial crisis in October 2008. 

It will mean higher mortgage payments for homeowners, which in turn is likely to drive up the cost of renting as landowners charge more to cover their mortgage. It will also mean people taking out loans will face higher borrowing costs, although it might benefit savers. 

“Family budgets are being hit on multiple fronts by rising costs, leaving millions with increasing levels of debt, or arrears, or they are forced to go without the essentials,” said Rachelle Earwaker, senior economist at the Joseph Rowntree Foundation (JRF).

“A big concern is that food inflation will be persistent leaving low-income families with still more impossible trade offs. The scarring effects may be felt for years to come, in the form of worse health and unmanageable debts.”

The Bank of England raises interest rates as a “tool to address inflation”, making it more expensive to borrow money and encouraging people to save. That means people are likely to spend less. 

“But it doesn’t help families afford their bills,” Earwaker warned. “What’s clear is people have run out of time and need proper solutions to problems. The government needs to make sure that at a minimum, everyone is able to afford the essentials and that universal credit is always enough to meet the costs of basic household items.”

The JRF found that seven in 10 low-income mortgage holders were going without essentials going into last winter, as “unbearably high inflation” outstrips the incomes of millions across the country. 

Around 2.7 million low-income households are having to take on debt as a means to afford the basics like rent, food and energy, according to the charity. Now, the cost of that debt is rising. 

“Nearly ten million people in the UK are already heavily weighed down by personal debt,” Joe Cox, senior policy officer at Debt Justice, said. “As households face falling incomes and rising costs, they are increasingly having to borrow to pay for essentials. Overdraft charges and borrowing rates are already at their highest for a decade, so today’s rise in the bank rate will add fuel to the fire.”

Carsten Jung, a senior economist at the think tank IPPR, claimed: “The Bank of England should have held off raising rates. The current approach risks creating big economic costs, in the form of lower future growth and fewer jobs, while not actually being effective enough at bringing down inflation.”

Jung fears there will be a “continued increase in inequality” as a result of this. “Many on low incomes, who are already the ones whose wages are least keeping up with inflation, are the ones hardest hit by lower growth caused by further rate increases. Meanwhile many firms are comfortably keeping up their profit margins,” he said. 

“Instead, we need a more balanced set of policies – including more fiscal policy action – to address the persistence of inflation. This should involve further price support measures to lower energy prices, excess profits taxes to disincentivise excessive price increases, and income support to help smooth out wage adjustments.”

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Debt charity StepChange warned the rise in interest rates could be a further catalyst for problem debt among mortgage holders nearing the end of fixed-rate deals, or for private renters whose landlords have passed on higher debt servicing costs.

“The steep jump in interest rates we’ve seen over the past 12 months has been a shock to household budgets, compounding financial difficulty for people who are already struggling to make ends meet,” Vikki Brownridge, the chief executive of StepChange, said. 

“As time goes on, more mortgage holders will be facing the prospect of a new fixed rate deal or variable rate which will consume a larger proportion of their income, making it increasingly difficult to meet other financial commitments.”

According to data from the company CreditFix, average debt levels have increased for both homeowners and renters. But homeowners have seen a larger increase in average debt, from £25,297 in 2022 to the current level of £30,208.

Brownridge added: “The situation is becoming increasingly precarious for many people and widespread problem debt is a risk, particularly for financially vulnerable households. We would urge firms to be proactive in identifying and communicating with customers who might be falling into difficulty by offering tailored support and signposting to free debt advice.”

The charity advises anyone worried about housing costs and their ability to cover payments that it’s important to reach out for help as early as possible, whether that’s through contacting their lender, or a free debt advice charity like StepChange.

Paul Nowak, the general secretary of the Trades Union Congress (TUC), said: “With the UK economy flatlining, and the value of everyone’s pay plummeting, another rate rise will make a bad situation worse.  

“The priority should be protecting living standards and boosting the economy to safeguard people’s jobs. The best way to do this is by giving working people decent pay rises that keep up with the cost of living.”

Rachel Reeves, Labour’s shadow chancellor, responded to the interest rates by saying the UK is a “brilliant country with so much to offer” but she blamed Prime Minister Rishi Sunak for a “mortgage crisis”. 

“Families and businesses across Britain will be spending today wracked with anxiety by another interest rate rise,” Reeves said. “The prime minister should take his fingers out of his ears and admit his personal responsibility for a Tory mortgage crisis leaving so many worse off. 

“He trapped our economy in a cycle of low growth and high taxes, while tickling the tummies of unfunded, trickle-down tax extremists in his party. Liz Truss simply came and lit the fuse. Labour will build a stronger economy and get it growing – and we’d bring in a proper windfall tax on the enormous profits of oil and gas giants now to ease this crisis.”

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The Big Issue’s #BigFutures campaign is calling for investment in decent and affordable housing, ending the low wage economy, and millions of green jobs. The last 10 years of austerity and cuts to public services have failed to deliver better living standards for people in this country. Sign the open letter and demand a better future.

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