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The news is particularly tough for anyone whose fixed deal is ending, who will find themselves paying around £150 a month more on a typical new two-year deal, as ITV News Economics Editor Joel Hills explains
Sir Howard Davies is a former senior Treasury official, banker and central banker whose career began in the aftermath of the 1973 oil crisis.
Davies, who stood down as chairman of NatWest two years ago, says unless the current conflict in the Middle East ends quickly – and fears about the economic fallout ease – borrowing costs in Britain are likely to keep rising “in the short run” for both households and the government.
According to Moneyfacts, rates on two- and five-year fixed mortgages have climbed to close to 6% since the war began four weeks ago – adding around £146 a month to repayments on a typical new two-year deal.
Mortgage rates on two-year fixes have risen by 1.01% in just four weeks – although that is less dramatic than the 1.81% spike following Liz Truss’s mini-budget.
Around 1.8 million households are due to refinance their mortgages next year.
“The unfortunate people who are coming off a fixed rate now and for the next few months are just going to be hit quite hard. And that’s very tough – it’s just bad luck on the timing,” Davies said.
“But that’s the nature of our mortgage market.”
Davies points out that before the financial crisis of 2007 to 2008, most people had variable-rate mortgages which rose and fell in line with interest rates.
Since then, the UK has moved to a system where borrowers fix their mortgages for set periods – and can face sudden “cliff edges” when those deals end.
Borrowing costs in the UK have risen faster than in the US and the Eurozone because investors see Britain as more exposed to inflation.
Markets are currently pricing in two interest rate rises before the end of the year.
But Davies argues that while higher energy prices will push inflation up, they will also hit demand.
His view is that the market reaction to the war is probably “exaggerated” – and that the Bank of England is likely to wait and see how the situation develops.
The government says it is prepared to offer support to households and businesses to cushion the impact of the energy shock.
Davies says targeted help – such as hardship funds for those on benefits and the most vulnerable – would be “perfectly reasonable”.
But he warns that broader, universal support risks fuelling inflation and “isn’t going to cause more tankers to come through the Strait of Hormuz”.
“I think reasonable people will say the government didn’t cause this problem,” he added. “And it’s not politically catastrophic for it to allow this to play out.”
With pressure mounting on ministers to act, Davies believes a squeeze on living standards is inevitable – and that households should be prepared to tighten their belts and ride the shock out in the months ahead.
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