Inflation pain: who will UK voters blame?
The transcript of the Political Fix podcast episode called "Inflation Pain: Who Will UK Voters Blame?" is available in audio format.
Sometimes, facing difficult situations can feel overwhelming. It may lead people to avoid dealing with it altogether by disregarding or denying it. This response is not helpful and will only worsen the situation.
Hey there, welcome to Political Fix - your ultimate insider’s guide to all things Westminster brought to you by the Financial Times and myself, Lucy Fisher. Our consumer editor, Claer Barrett, discussed the trending topic of inflation and interest rates in the previous segment. Today, we’ll analyze whether the elevated inflation rates will affect Rishi Sunak’s chances of being re-elected. Additionally, we’ll delve into whether it’s fair for the Bank of England to receive criticism and what measures the government can take to control inflation. Joining me on set is the esteemed FT columnist, Stephen Bush. Hi, Stephen!
Hi there, a warm welcome to Lucy Fisher and George Parker, our esteemed political editor.
Lucy Fisher began the week by asking Stephen what made him stop and take notice.
Stephen Bush's favorite moment during the recent political events was analyzing the division lists following the vote on Boris Johnson's future in the Privileges Committee. Although it was anticipated that all opposition parties would vote to hold it up, the interesting aspect was observing the approximately 100 Conservative MPs and determining the strength of the various factions within the Conservative party. This allowed for a clear understanding of the party's divisions, which is valuable during crucial moments. It was intriguing to observe retiring MPs with nothing to lose, as well as the real bedrock of the party, who own most of the land, coming out and saying that Johnson had to go. It was evident that some MPs were concerned for the Lib Dems in their own area, leading them to decide to vote against Johnson. This event was an enjoyable and fascinating afternoon of analyzing who could potentially make the next leadership election and have a chance of making the ballot of members.
George Parker expressed his fascination with the division that occurred, which went against the expectations of many. Although there was speculation that it would be an agreement between parties, the Labour party made a plot to initiate a voting process. George believes that Stephen has the knowledge to comprehend how this plan came to fruition, including the tactics for forcing a vote, even when there is no intention to oppose something.
Stephen Bush suggests that the best way to show opposition is to keep saying "no" loudly and persistently until the speaker yields. Interestingly, parliamentary divisions stem from Thomas Cromwell and Henry VIII's attempts to weed out dissenting voices during the king's divorce process. This allowed Cromwell to identify who was in favor of the king's policies and who was against them. Conservatives who think they can avoid a division should remember that the opposition can always force a vote and cause embarrassment for the ruling party.
George Parker shares that the Labour whips were utilizing tactics similar to Thomas Cromwell's to uncover individuals willing to publicly endorse Boris Johnson. In total, there were seven people who ultimately spoke out in support of Johnson.
George Parker got caught in Labour's trap, revealing how few supporters Boris Johnson has in parliament. However, he still has significant support in other areas, such as the press and the country. One of the best moments of the week was when Harriet Harman, who chaired the Privileges Committee investigation into Boris Johnson, was being attacked by Jacob Rees-Mogg, a strong supporter of Johnson. He claimed she was biased because she had previously spoken out against Johnson, but Harman revealed that she had informed the government beforehand, and they gave her the go-ahead to lead the inquiry. Rees-Mogg had no choice but to accept this and move on.
Lucy Fisher shared her thoughts on a recent speech made by David Lammy regarding Labour's foreign policy. Lammy's vision includes placing economic diplomacy at the core of the UK's foreign policy, with the aim of outshining the current government. Fisher found Lammy's ideas interesting, especially the notion of reviewing the locations of the UK's diplomats, potentially shifting them to countries like India that play a pivotal role in Britain's prosperity and supply chains. Lammy also suggested the creation of a new business council to offer advice on foreign policy, which aligns with Labour's current ethos. Fisher believes it's a shame that the government disregards economic input.
I find it fascinating that the same strategy suggested by William Hague, which aimed to turn our diplomats into salespeople for the country, is being implemented now. It seems like a return to the approach Hague had proposed.
Let's shift our focus to the main topic for this week, which is how the Bank of England's latest rate increase will affect us. Fortunately, we have two leading experts from the FT to guide us through this. We have Chris Giles, the FT's economics editor, who will discuss the economic aspects, and Claer Barrett, the FT's consumer editor, who will address our personal finances. Chris, over to you. Hello.
Lucy Fisher, it seems like you've had a hectic week, Chris. Last Thursday, we saw an increase in interest rates from 4.5 per cent to 5 per cent. Can you give us an overview of what we can expect in the near future? There is a lot of chatter about interest rates possibly going up to 6 per cent by the end of the year, and many sources suggesting that a recession is almost certain to occur.
On Thursday, the Bank of England did not give any indication that they will not raise interest rates further. They did not provide any additional information beyond their statement, nor did they give any indication that they were considering any other options. They have not stated that they will increase interest rates to 6%, but the data they have received regarding inflation and wages since their last meeting in May has been poor. Therefore, they will take a significant step and wait to see what happens. If the data continues to reflect negative trends, they will likely increase interest rates to the aforementioned levels, or possibly higher. However, if things start to improve over the summer or early autumn, there is a possibility that they will not definitively raise the interest rates to that level.
There is currently a lot of criticism directed towards the Bank of England and its governor, Andrew Bailey. This is due to Bailey's previous claims regarding inflation, where he claimed that it was only a temporary issue. However, as we have now seen, inflation has proven to be much more persistent than Bailey had anticipated, which has led to increasing scrutiny of both Bailey and the bank as a whole. Is it warranted for them to be facing this level of criticism?
Chris Giles believes that public officials in important positions should always be subject to scrutiny, even though Andrew Bailey sometimes feels it is unfair. But criticism should be done properly by acknowledging external factors that the bank has no control over, such as the impact of the Ukraine conflict on food and energy prices. Despite this, it is fair to say that the bank has been behind the curve in forecasting inflation and has consistently underestimated the severity of the situation over the past four months, affecting prices in shops presently.
Chris Giles pointed out that there are many individuals at the bank who are responsible for ensuring accurate and reliable information is presented. Therefore, it's understandable to criticize the bank if they fail to meet these expectations. However, Andrew Bailey has demonstrated sensitivity in some situations, such as during a press conference in May where he expressed discomfort with journalists' tendency to use blame-related language - even though such language is common among journalists.
Our money is important to us.
We enjoyed Chris Giles' comments about the bank's response to criticism, noting that there was some tension when people suggested they needed to defend their record. While the bank has a valid defense, they may need to clarify their message and acknowledge any mistakes, as they often hesitate to admit fault. It's worth noting that in 1997, the government tasked the Bank of England with controlling inflation, recognizing that public officials who don't face elections may be more transparent with the public.
Chris Giles has expressed his opinion that the Bank of England often sounds like politicians, constantly trying to protect themselves and deny any fault. He believes it would be more effective if the Bank acknowledged their mistakes and explained how they plan to address them. In conclusion, Giles suggests that the Bank should move in that direction.
So, Chris, Rishi Sunak made a promise earlier this year that he would cut inflation in half as one of his top five priorities. Do you think this was a reckless promise to make? Does he have the necessary measures to bring it down? And is it even feasible for him to achieve this goal?
Chris Giles hasn't really come up with a concrete plan. He thinks that he could increase taxes significantly, but he hasn't specified how.
Chris Giles suggests that the slowing down of inflation is not desirable, despite expectations that the Bank of England's pledge to meet inflation targets would not be missed. However, while everyone initially believed that inflation would decrease faster than it has, meeting the target has become more uncertain. The Treasury has narrowly defined the target at a 5.4% inflation rate in the fourth quarter of this year, with 3.6 percentage points already used up. Therefore, inflation needs to decrease by half in the second half of this year, which is proving to be a difficult task.
Hello, Lucy Fisher here. I want to extend my gratitude to Chris Giles, the FT's editor specializing in economics, for being with us today.
We've got Claer Barrett with us, who writes an important column called Serious Money and hosts a popular podcast called the Money Clinic at FT. Hello, Claer.
Many thanks for inviting me.
Lucy Fisher could you please provide us with some background information? What is the current number of individuals impacted by the need to adjust their mortgage or dealing with increased interest rates in the UK?
According to UK Finance, the trade body for banks, approximately 800,000 borrowers will reach the end of their fixed-rate deals by the end of this year. In the following year, over a million more borrowers will join them. This process is increasing at a rapid rate, with more and more people coming to the end of their fixed-rate deals. Unfortunately, interest rate rises affect these borrowers unfairly, especially for younger people with larger loans who bought property when prices were high.
Wow, can you imagine being a first-time homebuyer who purchased a house during the stamp duty holiday two years ago? Now, you might have a new baby and childcare expenses to add to your monthly budget. It's definitely going to be a tight squeeze financially. On the other hand, there are older people who have paid off more of their loans, so they have less debt to worry about. Then, there are some people who have already paid off their mortgages and won't be affected by this at all. These individuals are typically older voters who the Conservative party is known for pandering to. Even if interest rates rise significantly, these individuals will still have plenty of spending power.
The Bank of England's rate increases took a long time to take effect, likely due to reasons clarified by Claer Barrett. As a result, Thursday's substantial rate hike occurred.
Lucy Fisher questions whether the Labour party's statement about an alleged penalty of £2,900 for Tory mortgages is a justifiable approach to the current crisis that many citizens are encountering.
I strongly object to the use of averages because it causes panic among people.
As someone who deals with mortgage concerns, my main goal is to soothe anxieties that people may have. It's important to recognize that every person's situation is unique. The reported increases in mortgage costs are often based on what the best possible rate would have been a few years back compared to the current worst possible rate – which is the standard variable rate that lenders offer you. The letters that are sent by lenders typically use these numbers to scare people into taking action. However, we must remember that these intimidating figures may cause some individuals to feel overwhelmed and avoid addressing the issue entirely. Unfortunately, ignoring the problem is the worst course of action when confronted with a major financial obstacle.
Many people are finding themselves in financial trouble for the first time in their lives due to the current situation. It's important for these individuals to communicate with their lenders and seek assistance, but understandably, they may be concerned about the impact on their credit score. However, reaching out for help will not affect their credit score. It's important for the government to ensure that free debt advice is adequately funded as the demand for it is likely to be higher than ever before. Debt advisers and mortgage lenders may need to work together to help people understand their options. Making decisions about debt can be challenging, and it's essential that scare tactics are not used in the process.
Lucy Fisher shared some valuable tips for individuals who hold mortgages as well as for the chancellor. Although it is confirmed that Rishi Sunak and Jeremy Hunt have no plans for direct assistance, what other options are available to provide aid to those struggling with mortgage payments? Perhaps exploring alternatives such as increased funding towards providing debt guidance can help alleviate the financial burden for mortgage holders.
Claer BarrettSo, the responsibility is being shifted to mortgage lenders who have committed to giving borrowers the option of forbearance. The terms of forbearance can vary greatly and will be determined based on your specific situation. For example, it may be possible for you to make interest-only payments for a certain amount of time or have your loan term extended. Another option is for you to accumulate arrears on your mortgage. While a reduced payment plan is available with the consent of your lender, any unpaid debts will be tacked onto your mortgage balance, affecting your credit rating.
I believe that various lenders will provide varied solutions to their clients. However, I am worried that the playing field may not be fair or transparent enough. This concern has been highlighted by some remarks made by the shadow chancellor in Parliament.
Right now, if your bank decides something that you disagree with, you can take the matter to the Financial Ombudsman once you've exhausted the bank's own complaints procedure. However, the Financial Ombudsman is struggling with the number of complaints they receive, meaning it may take between six and nine months for someone to look into your case. This is a big problem when it comes to mortgages and the possibility of losing your home - time is precious in these cases. We need a clear and efficient process for people to dispute unfair treatment from lenders. It's important that the public can trust the system, so treating borrowers fairly is essential.
Hey Lucy, another important thing to remember is that renters have been bringing attention to their plight all week. As landlords continue to increase rent prices, renters are feeling the financial strain. Luckily, there is something the government can do to help. They can review the local housing allowance, which determines how much assistance people on benefits who rent from private landlords receive towards their rent. Even though rent prices are rising, the local housing allowance has remained frozen since 2020. Unfortunately, millions of people who rent in the private sector won't be eligible for these benefits. This situation is causing renters to worry about the future and whether or not landlords will abandon the rental market.
In order to combat the issue at hand, we need to focus on creating more affordable rental housing in the long run. This means not relying on shared ownership or programs like Help to Buy that can lead to unmanageable debt. Instead, we should provide funding for housing associations and councils to construct more rental properties. Alternatively, we could establish a market for professional renters similar to what is seen in countries like Germany. It's important that we move away from the notion that owning a home is the only way to go and shift towards a more sustainable renting lifestyle.
I want to express my gratitude to both Chris and Claer. If you happen to be concerned about your mortgage, you should definitely listen to the next episode of Claer's podcast FT Money Clinic, as she has created a very useful and straightforward manual. I strongly suggest you check it out.
Lucy Fisher is addressing George and Stephen, expressing gratitude for their presence. Moving forward, Lucy directs a question towards George regarding the potential breach of Rishi Sunak's promise to cut inflation, and questions whether this scenario would have a negatively significant impact on the Conservatives' electoral prospects.
George Parker emphasizes that Rishi Sunak's goal of reducing inflation to 5.4% is a self-imposed target and may not necessarily align with the priorities of the electorate. While achieving this goal may be commendable, voters will not be pleased if they suddenly face higher mortgage payments. This issue could become a major problem for the Tories during the election year, as it could coincide with a possible recession and high living costs. Along with Boris Johnson's problems and the poor functioning of public services, the Labour Party has an excellent chance of winning if they take advantage of the situation.
Lucy Fisher giggled and said, "Let's discuss that, Stephen." Keir Starmer raised the Tory mortgage penalty matter during PMQs, attributing it to Liz Truss and Kwasi Kwarteng's kamikaze budget in the last fall. Meanwhile, Rishi Sunak suggested that although inflation has been persistently high in the UK, it has also been high in the US and eurozone. What do you believe the voters will approve of?
Stephen Bush believes that the Liz Truss era hurt the Conservative Party's reputation in terms of handling inflation. While Brexit did contribute to the problem, most of the burden lies with external factors. However, according to polls and focus groups, people tend to blame the Conservatives for inflation. Rishi Sunak has attempted to distance himself from the Truss era, but his efforts have been subtle and may not have reached the average person. Bush believes that a shareable graphic, such as the Kamikwasi meme from the Truss era, could have a significant impact on voters.
Lucy Fisher suggests that the Conservatives have set themselves up for a difficult situation in which the public expects the government to intervene in various crises. This expectation was initially established during the pandemic with the furlough and fine programs. Subsequently, the government provided expensive energy support schemes for bills in Ukraine and elsewhere. Given these precedents, it is not surprising that both the general public and Conservative party members are urging the government to assist mortgage holders.
According to George Parker, it seems inevitable that some Conservative MPs will call for tax cuts and state interventions to help mortgage holders, despite criticism towards the government's support packages. Despite frustration from Downing Street, it would be unfair and counterproductive to intervene in this case, especially as it would negatively affect renters and those who do not own homes. It would also be economically unwise, as the Bank of England is actively trying to slow the economy down. While the government is unlikely to take this path, opposition parties such as the Liberal Democrats may still call for such action.
Lucy Fisher is curious about the Labour party's stance on tackling inflation. Rachel Reeves proposed a five-point mortgage relief plan that aligns with what the Financial Conduct Authority is already instructing lenders to offer, such as providing interest-only mortgage options or extending the mortgage term. Although, Lucy wonders if Labour has a better strategy to combat inflation.
Stephen Bush expressed concern about the inflation strategy of the Labour party. He hopes that by the next election, inflation will peak and the party will benefit from the recovery. Despite criticism of the Bank of England, it appears to be the only entity committed to fixing the inflation problem. This highlights the importance of central bank independence. The Labour party, Liberal Democrats, and backbenchers are making noises about the issue, while the Conservatives may cut taxes. The central bank is thus an essential tool in tackling the problem.
What's our opinion about the possibility of a recession? Lucy Fisher and George, do you both have any thoughts on it?
I believe a recession could happen, but it's not guaranteed. Andrew Bailey, the Bank of England governor, stated that he won't intentionally cause a recession but will take measures to prevent inflation. This implies that a recession might occur if necessary. Chancellor Jeremy Hunt has also acknowledged this possibility. However, this is a technical matter that most people may not understand. They will only feel the impact through their weekly budget, shopping bills, and mortgage payments. A recession could potentially add to the perception that the Conservative party has mismanaged the economy, especially if it's discussed in the media frequently leading up to an election year.
Lucy Fisher predicts that the future might seem bleak. However, to finish on a positive note, let's discuss something happier. Stephen, what activities have you undertaken this week, and what do you plan on doing over the weekend?
This week, I've been re-reading the MacCulloch biography of Thomas Cromwell. Sorry if I messed up the pronunciation for our Scottish listeners. It's a captivating book - I find biographies from that era particularly compelling because the subjects tend to die at the end of their careers, unlike today where people seem to go on and on. It's been a great read so far and I'm really enjoying it. What are you eagerly anticipating?
Lucy Fisher here. I'm excited to share that I'll be attending the Peasmarsh Chamber Music Festival this weekend, where I'll get to enjoy some wonderful performances of Stravinsky and Mendelssohn. George, are you also attending the festival?
George Parker has shared his thoughts on the new James Graham play, "Dear England," which focuses on the story of Gareth Southgate and the reinvention of the England team. Despite being slightly overlong and clunky in places, Joseph Fiennes delivers a brilliant performance as Southgate. The play serves as an allegory for reinventing the nation as a whole and becoming a more compassionate place, with a focus on issues such as free school meals and racial harmony. Overall, it's a fun play that balances its serious point with some humorous moments, as is typical of James Graham's work.
Lucy Fisher is wrapping up the latest episode of the FT's "Political Fix" podcast and thanking guests Stephen Bush and George Parker. She encourages listeners to subscribe to the podcast on their preferred platform and leave positive reviews to help promote it. Fisher is the presenter of the podcast, while Anna Dedhar and Audrey Tinline produce it, and Manuela Saragosa is the executive producer. Breen Turner handles the music and sound engineering, and Cheryl Brumley is the FT's global head of audio. Fisher promises to return with a new episode next week.
