Autumn Budget: Government ‘willing to act on inflation’. What will this mean for mortgages and savings?

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The chancellor used his Autumn Budget to announce that the government is ‘willing to act on inflation’ amid growing concerns surrounding the rising cost of living. So what will this mean for mortgage holders and savers? Let’s take a look.

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What did the chancellor say about inflation?

A host of measures were announced in the Autumn Budget, including changes to beer duty, Universal Credit and the government’s home building strategy. However, for existing homeowners and those with savings, the most important announcement came when the chancellor revealed the government was ‘ready to act’ on inflation.

Rishi Sunak explained, “I understand people are concerned about global inflation – but they have a government here at home ready and willing to act.

He added, “In terms of our fiscal policy, we are going to meet our commitments on public services and capital investment, but we are going to do so keeping in mind the need to control inflation.”

In his speech, the chancellor suggested that the rising inflation rate was likely due to increased demand for energy, as well as supply chain issues.

Sunak’s statement will have been welcomed by those concerned about rising inflation, especially as the Office for Budget Responsibility (OBR) revealed on 27 October that inflation was likely to surge to between 4% and 5% next year. Currently, inflation sits at 3.1% according to the Consumer Prices Index.

The chancellor’s tone on inflation contrasts with recent comments made by the prime minister. Earlier this month, Boris Johnson revealed he was ‘not worried’ about rising prices, claiming supply chains will ‘sort themselves out rapidly‘.

What about the UK economy?

The chancellor described the UK economy as ‘strong’ in his Autumn Budget. His comments came after the OBR claimed the British economy was set to return to its pre-pandemic level six months earlier than predicted.

Sunak revealed that the economy was likely to grow by 6.5% this year. This is well ahead of the previous 4% forecast made in March.

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What will be done to control inflation?

Many believe that the current HGV driver shortage is fuelling inflation due to the impact it’s having on supply chains. To address this, the chancellor used his Autumn Budget to announce that the HGV road user levy will be suspended until 2023. The tax was already suspended until August next year. It’s hoped the extension will encourage more drivers to take up work on British roads. 

To further support drivers, the chancellor also revealed the freezing of vehicle excise duty for HGVs.

Aside from this support, the chancellor revealed little else about what his government would do to address rising prices. Many will be particularly disappointed that no announcement was made on reducing VAT on energy prices amid surging costs.

Despite this, many will take comfort that the government has now acknowledged that inflation is a real problem.

What does rising inflation mean for savers and mortgage holders?

Rising inflation erodes the value of money. So if you’re a saver earning an interest rate lower than inflation, then your cash is effectively losing value. Despite this, many will hope that rising inflation will persuade banks to up their savings rates in order to give savers some respite. Yet there is no guarantee. Savers are likely to find it difficult to keep up with inflation for the foreseeable future.

For homeowners, it’s a different story. Those with long-term fixed mortgage deals won’t be immediately impacted by rising inflation. However, those on short fixes or on standard variable rate (SVR) mortgages will likely face higher costs in future. That’s because lenders will want to ensure their interest rates are comfortably above the rate of inflation.

For this reason, those looking for a mortgage may wish to consider longer fixed deals because higher rates may be just around the corner.

Will the Bank of England finally raise its base rate?

The biggest influence on rising prices is the Bank of England’s base rate, which currently sits at 0.1%. Many will be hoping the base rate increases when the Bank’s monetary policy committee meets in November.

In September, Bank of England Governor Andrew Bailey said the central bank ‘will have to act’ over rising inflation. However, it remains to be seen whether the base rate will rise this year.

Many cynics believe that the Bank has purposely resisted temptations to raise its base rate because approximately 25% of government debt is linked to inflation. As a result, hiking the base rate would add billions to the public balance sheet.

Are you keen to learn more about the Autumn Budget? See our articles on changes to Air Passenger Duty, Universal Credit and alcohol duty.

The post Autumn Budget: Government ‘willing to act on inflation’. What will this mean for mortgages and savings? appeared first on The Motley Fool UK.

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