ALEX BRUMMER: On energy policy, our leaders have failed us allFebruary 3, 2022
ALEX BRUMMER: I warned 20 years ago that our energy policy could see Britain’s lights go out. Our leaders have failed us all
The fool’s paradise of capped energy prices, cheap borrowing and working from home created by successive governments yesterday came to an abrupt end.
The combination of a devastating rise in the cost of energy for 22million households, an end to bargain-basement mortgages, and the prospect of a heavy blow to the incomes of every citizen has been a disaster long in the making.
And the day the chickens came home to roost has quite rightly been dubbed Black Thursday.
Those among us who were so confident that Britain’s brilliantly successful vaccination rollout and bold approach to re-opening the economy would lead to a great bounce for growth and prosperity must think again.
For our political and financial leaders, with their short-term thinking and appallingly bad forecasting, have failed us all.
Putting the pandemic to one side, the roots of the current crisis can be traced to the energy price cap, a concept first propagated by Labour’s Ed Miliband and then adopted by former Prime Minister Theresa May in 2017.
In 2017, then Prime Minister Theresa May adopted the energy price cap, a concept first propagated by Labour’s Ed Miliband
At the time it was seen as a quick fix of the problem of yo-yoing domestic gas and electricity bills.
But a steep rise in the wholesale price of natural gas as the world emerged from the pandemic blew the price cap to smithereens. And the problem is all the more serious due to the Government’s obsession with reaching its zero-emissions target.
In its haste to move away from fossil fuels, it made us more dependent on unreliable renewables such as wind and solar power.
This paper warned two decades ago of the risk of the lights going out as the nation rushed willy-nilly into renewables, failed to invest in gas storage and processing terminals for liquefied natural gas and instead chose to rely on imports from Norway, Russia and France via pipelines.
As a result, we are now much more at the mercy of geo-political events, and with Russia – the world’s second biggest gas producer – massing its troops on the Ukraine border, we are more vulnerable than ever.
Labour’s Ed Miliband was the first to suggest the energy price cap. At the time it was seen as a quick fix of the problem of yo-yoing domestic gas and electricity bills
Meanwhile, the Bank of England has been caught hopelessly off guard by the steep rise in the cost of living.
For too long it stuck to the mantra that the rise in the consumer prices index was transitory (a position taken until yesterday by the European Central Bank in Brussels).
But it now admits that inflation will surge to 7.25 per cent in April and will be way above the 2 per cent target set by the Treasury right through this year and in 2023.
The Bank projects that inflation-adjusted post-tax incomes – including the swingeing 1.25 percentage point rise in national insurance contributions to be introduced in April – will fall by 2 per cent this year and a further 0.5 per cent in 2023.
To put the damage in perspective, that is a bigger reduction than the 0.3 per cent drop in real incomes in the aftermath of the 2008-09 financial crisis, which ushered in austerity and a decade in which earnings remained stagnant, or even fell.
The impact of all this on growth in the current year, when the UK was set to be the fastest growing among the richest G7 nations, will be startling.
The nation rushed willy-nilly into renewables, failed to invest in gas storage and processing terminals for liquefied natural gas and instead chose to rely on imports from Norway, Russia and France via pipelines. Pictured: A fireball rises from an explosion during the joint exercises of the armed forces of Russia and Belarus at a firing range in the Brest Region, Belarus
The Bank has already slashed its GDP forecast for 2022 to 3.25 per cent from its previous forecast of 3.75 per cent, a rate of growth that is barely sufficient to restore the nation’s wealth to pre-pandemic levels.
All this has left Bank Governor Andrew Bailey with egg all over his face.
And by raising the interest rate in both their latest rate-setting meetings – it is now at 0.5 per cent, up from 0.1 per cent in December – the Bank has delivered an enormous shock to the money markets, home-buyers and borrowers.
But this is by no means the end of the tightening cycle. The Bank rate, which leads the cost of mortgages and other loans, is now projected to rise to 1.25 per cent by the year’s end and could go even higher in 2023, shutting the door on low-cost fixed rate mortgages and potentially taking the air out of the house-price balloon.
The UK chooses to rely on imports from European countries via pipelines. Pictured: Nord Stream 2, in Germany, transports Russian natural gas from Russia to Germany
In addition, the Bank has also called an end to the era of easy money by halting and reversing quantitative easing – under which the Bank injects cash into the economy by buying bonds on the open market – a policy introduced during the credit crunch and speeded up in the Covid era.
Instead of the coiled spring of recovery hoped for as the pandemic retreated and £220billion of savings was released into the economy, that money will now likely be burned on energy bills and mortgages.
On top of this, the country faces the self-inflicted wound of a national insurance rise which removes more than £12billion a year from the pockets of consumers and business.
Raising taxes at this point in the recovery cycle is an act of economic sabotage which should not be allowed to happen.
Interest rates rise again
By Victoria Bischoff, Money Mail Editor for the Daily Mail
Around two million homeowners will be hit by mortgage bill hikes within weeks.
The Bank of England’s decision to raise interest rates to 0.5 per cent will cost the average borrower with a £150,000 variable rate loan £21 more a month or £252 a year.
Repayments for those with larger mortgages of £450,000 will jump by a more dramatic £62 a month or £744 a year, according to broker L&C.
This is the second base rate increase in less than two months and a major blow for borrowers already facing crippling energy bill rises and tax hikes.
Analysts also warned that spiralling inflation means the base rate is on course to rise even faster than expected. AJ Bell predicted it will hit 1 per cent by May and 1.5 per cent by the middle of next year.
The Bank of England’s decision to raise interest rates to 0.5 per cent will cost the average borrower with a £150,000 variable rate loan £21 more a month or £252 a year. Pictured: Governor of the Bank of England Andrew Bailey
At 1.5 per cent, a typical £150,000 loan would cost homeowners an extra £1,272 a year. Those with a £450,000 mortgage would pay £3,804 more.
Myron Jobson, senior personal finance analyst of Interactive Investor, said: ‘Upping the rate of interest is meant to rein in the ballooning cost of living, but it will have the opposite effect for the 1.1million homeowners on standard variable rates and the 850,000 on tracker deals’.
Consumer champion Martin Lewis, of Moneysavingexpert.com, added that the interest rate rise would ‘add fuel to the financial fire’.
Britain’s biggest building society Nationwide revealed it would pass on the full 0.25 percentage point increase to customers on tracker and standard variable mortgage deals less than two hours after the Bank of England’s announcement.
Price hikes will take effect from March 1, with borrowers on its standard variable rate paying 3.99 per cent. But savers will have to wait to find out if they will benefit from higher interest rates, it said.
And while Nationwide has raised some savings rates, customers with its popular easy access account continue to earn as little as 0.01 per cent.
Santander was also quick off the mark with a mortgage rate rise. Borrowers on its older standard variable rate deal will pay 4.74 per cent from March.
Skipton Building Society said rates for customers on tracker deals would increase within two weeks. Barclays will pass on the full rate rise to customers on standard variable and tracker deals from March 1.
Repayments for those with larger mortgages of £450,000 will jump by a more dramatic £62 a month or £744 a year, according to broker L&C (file picture)
Tracker rates for new borrowers will increase from today. Yet while most banks will be quick to pass on any rate rises to mortgage customers, experts warned that savers are likely to miss out.
Many high street giants have failed to improve their savings deals after the base rate rose from a record-low 0.1 per cent to 0.25 per cent in December.
Laura Suter, head of personal finance at AJ Bell, said: ‘While banks are quick to pass on base rate increases to their mortgage customers, savers will have to wait longer and many won’t see any increase at all. Instead banks will pocket the difference to boost their profits.’
Even if banks do pass on the full rate rise to savers, even the best deals will still not come close to matching inflation, which is now expected to hit more than 7 per cent in April. This means savers’ spending power will be eroded. The most recent rate of inflation was 5.4 per cent.
Borrowers who have locked into a fixed mortgage will not see any bill increase until their deal expires. But with interest rates tipped to rise five more times this year, many lenders are pulling their cheapest deals for new borrowers.
David Hollingworth, of mortgage broker L&C, said: ‘If mortgage borrowers failed to take notice of the December hike then hopefully the decision to lift rates again will be enough to trigger a reaction.
‘Mortgage rates have already risen from the ultra-low trough of last year but still offer borrowers substantial savings and a chance to remove any uncertainty.’
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