Interest rates

Kwarteng outlines growth plan in battle to keep interest rates low

Former Cabinet Minister Grant Shapps said: “The Conservatives are the party of home ownership and so it is vital that the Chancellor does all he can to reassure the markets about our fiscal plans.

“Backbenchers like me are therefore very pleased that Kwasi Kwarteng has presented his economic plan to this month and wisely said that this will also include the analysis of the Office of Budget Responsibility.

“These measures will provide relief to millions of homeowners who are worried about the end of their term mortgage. They need to know that this government is on their side and that this decision will help them.

Mel Stride, Tory MP and chairman of the Treasury Select Committee, said the decision to present the plans to show the government has a firm hand on the public purse is “essential for millions of mortgage holders”.

However, the proposals failed to reassure markets as UK bonds and the pound fell further.

The yield on 10-year gilts – the benchmark for borrowing costs in the UK – came close to a 14-year high after the mini-budget, rising 0.24 percentage points to almost 4.5%. The British pound fell 0.6% against the dollar to $1.10.

Paul Johnson, director of the IFS, said the government is on track to borrow nearly £200bn this year and then £100bn a year in coming years, adding that the precise figure is very uncertain.

An extra £62billion will be needed to stabilize debt as a share of national income four years from now, the IFS said.

Mr Johnson said: “It is roughly possible to see how Mr Kwarteng could go into debt on a flat or even slightly declining path in the final year of his forecast.

“He could, for example, announce a combination of cuts to working-age benefits and capital investment, as well as unspecified cuts to public services planned for the years after 2025.”

The IFS and Citi economists predict that higher interest rates will raise annual costs for the average household by more than £1,500 by the middle of next year.

This adds to the pain already suffered by families as food price inflation is on course to hit 17% and the cost of imported goods is already rising due to the weak pound. They expect a recession to last until 2024.

A Treasury spokesman said: “Through tax cuts and ambitious supply-side reforms, our growth plan will deliver long-term sustainable growth, which will lead to higher wages, greater opportunities and sustainable financing of public services.

“The government is committed to fiscal responsibility and to ensuring that debt as a proportion of GDP declines over the medium term. The Chancellor will provide further details in the medium-term budget plan on October 31, alongside a full forecast from the OBR.

The largest number of households will take out a fixed rate mortgage deal next year since UK Finance started keeping records in 2017.

The average interest rate on a new mortgage deal in March 2021 was 1.96%, according to analysis by Capital Economics, which equates to a monthly payment of £844 on a loan typically of £200,000 set over two years .

When the same borrower repays in March next year, the average rate will have more than tripled to 6%, pushing monthly payments up to £1,289, a jump of £445.