Retail chain Next has warned that shoppers are reducing spending ahead of Christmas as household finances come under increasing pressure. The warning comes as multiple major employers announce significant cutbacks, suggesting an economy struggling under the weight of higher borrowing costs and rising living expenses.
BT said it is cutting thousands of additional jobs, having already slashed more than 11,000 positions this year. Housebuilder Vistry is closing half its regional operations and laying off staff to tackle mounting debt amid falling demand for homes, particularly social and affordable housing. Britain's largest brick maker, Ibstock, has reduced brick production by a fifth because of collapsing demand. These retrenchments stand in sharp contrast to the Bank of England's decision to raise interest rates by a quarter of a percentage point to 4 per cent, the first increase in more than three years. All nine members of the Bank's Monetary Policy Committee voted for a rise, though one member favoured a larger half-point increase.
Bank of England Governor Andrew Bailey warned that further rate rises may follow if the Middle East conflict continues, pushing energy and fuel costs higher. The Office for Budget Responsibility has forecast growth of just 1 per cent for next year, with consumer prices peaking at 3.75 per cent. This contrasts with the Bank's own more optimistic projections of 1.6 per cent growth and 4.9 per cent inflation. Meanwhile, Ofgem is set to lift electricity prices by up to 27 per cent from January. According to Moneyfacts, the average two-year fixed-rate mortgage deal now stands at 5.97 per cent, up from 4.83 per cent at the start of the year, with annual mortgage costs rising by more than £2,000 since early military strikes on Iran.
Economist Kallum Pickering at Peel Hunt said the Bank has acted ahead of available evidence, with limited proof that higher energy prices are creating knock-on effects requiring rate rises. Nearly nine out of ten mortgages are on fixed-rate deals, many of which already reflect expectations of higher rates. With 2.3 million mortgages due to expire next year, fixed-rate costs could potentially fall despite the base rate increase.
For savers and borrowers, this means existing fixed-rate mortgages may see cheaper deals at renewal despite the rate rise, but new borrowers face significantly higher costs while the economy shows clear signs of contraction.