Monthly mortgage repayments could increase by hundreds of pounds a month if inflation spirals out of control.

Chancellor Rishi Sunak delivered his budget today and went on a spending spree after the public books showed a far healthier picture than had been feared at the start of the pandemic.

But the rising cost of living hangs over his plans – and the UK’s fiscal spending watchdog has warned it could get much worse than previously thought.

The Office for Budget Responsibility (OBR) previously predicted CPI inflation, which measures the cost of consumer goods, would rise to 4.4% next year.

Given it stood at just 0.9% 12 months ago, that’s already a big jump – but it could be worse.

The respected economic body warned the picture has changed even in the short time since it closed its forecast for this year’s outlook.

It said it now envisioned inflation could climb to close to 5% and set out a scenario in which it rose even higher.

In this gloomier model, the rise in the cost of living hits 5.4%, higher than at any point in three decades.

Under those circumstances, the Bank of England might have to raise interest rates to 3.5%, up from its current historic low of 0.1%.

The move would put a lid on rising prices and help prevent a cost of living crisis – but it would hit homeowners in the pocket.

After an era where mortgage holders have been used to their repayments staying virtually static year to year, there could be a dramatic jump.

Speculation is mounting that the central bank will increase rates next week, but it’s likely to only be by a fraction of 1% initially.

Even a rise of that size would make mortgage holders feel the pinch but the worst case scenario mapped out by the OBR would feel more like a household budget crisis, with potentially hundreds of pounds more leaving homeowner’s accounts every month.

A rise in interest rates also has a big impact on the public finances because the Treasury has to pay back more on its debt.

Mr Sunak warned today  that even a one percentage point increase in interest rates would cost the country £23 billion in payments on its debt mountain.

Mel Stride, Conservative chairman of the Treasury Select Committee, warned ‘the threat to the public finances through inflation cannot be understated’ and the ‘big debate’ is if the increases will be transitory or persistent.

He said: ‘The huge challenge here and danger is that we go into a wage-price spiral, and one of the ways that might happen is if we talk up wages, if we invoke companies to put up wages without a coincident increase in productivity that will simply feed the inflationary tiger, and we have to be very careful on that point.’

He added: ‘I have a feeling that these inflationary pressures are going to be rather more than many imagine them.’

SNP Westminster leader Ian Blackford said inflation ‘may well be the defining issue of many budgets to come’, as he cited warnings it could soon hit 5%.

He told MPs: ‘Mortgage holders are rightly fearful that this inflationary spike will be met with a rise in interest rates.

‘The chancellor seems to think that all of this is merely transitory but complacency on this issue is simply not an option.’

Get in touch with our news team by emailing us at [email protected].

For more stories like this, check our news page.

Autumn Budget 2021: All the key points from Rishi Sunak’s plan

Rishi Sunak has announced the largest increase in public spending in a century in a budget that has promised ‘the start of a new post-Covid economy’.

Many of the headline policies include a rise in the national living wage and a pledge to spend billions on the NHS.

Here are the main changes you need to know about:

• Will you be worse off or better off? Our Budget calculator reveals the true cost
• Universal Credit raised for 1,700,000 people with 8p boost to pay packet
• Developers will pay £5,000,000,000 tax to fix homes with dangerous cladding
• Fuel duty will not increase as prices at the pumps hit record high
• Millions of key workers set to be paid more as Rishi Sunak confirms end to pay freeze
• National living wage rises to £9.50 an hour
• Pints of beer cut by 3p and sparkling wine is about to become cheaper
• Prepare for a pricey Christmas as inflation ‘likely to rise’

Source: Read Full Article