Rishi Sunak on Tuesday admitted that inflation was proving “more persistent than people anticipated”, as he pledged to bear down on public borrowing and to take a “responsible” approach to public sector pay.
The prime minister said the Bank of England faced “difficult” decisions and that higher interest rates were taking longer to slow the economy because more people were protected by fixed-rate mortgages.
Speaking to senior MPs, Sunak said it was vital the government backed the BoE by being “responsible” on borrowing and on public sector pay, warning: “If we get those things wrong that makes the inflation situation worse.”
Sunak will in the next few weeks decide whether to endorse pay rises proposed by independent review bodies for public sector workers, with ministers hinting that expected increases — of typically about 6 per cent — may have to be curtailed to squeeze inflation.
Speaking at the House of Commons liaison committee, Sunak was repeatedly pressed on whether he would hit his target of halving inflation to 5.4 per cent by the end of the year, but he declined to answer.
Asked by Harriett Baldwin, Tory chair of the Commons Treasury select committee, what percentage chance he would put on achieving that inflation goal, he said: “I don’t have one. We are working 100 per cent to deliver it.”
Sunak admitted the BoE’s task of cutting inflation to the central bank’s target of 2 per cent had been complicated by the higher proportion of people on fixed-rate mortgages, meaning they are sheltered temporarily from rising borrowing costs.
He said the “transmission mechanism” through which higher BoE rates were passed through to households was “perhaps slower when it comes to mortgages than in the past”.
According to BoE data, 95 per cent of residential mortgages advanced in 2022 involved fixed rates. That compares with 92 per cent in 2019 and 77 per cent in 2013.
Sunak said the government had to support the BoE through tight fiscal policy and supply-side reforms intended to increase the capacity of the economy to grow without overheating.
The prime minister, grilled by the cross-party group of MPs, also backed the financial regulator in trying to ensure that higher interest rates were passed on to savers.
The Financial Conduct Authority will meet banks on Thursday to discuss the lag in passing on higher BoE rates to people with instant access savings accounts. Sunak agreed that “the issue needs resolving”.
He said he “fully supports” the FCA’s work and said the watchdog would from August 1 have powers to pressurise banks through a new “consumer duty” placed on financial services companies.
In evidence spanning numerous subjects and lasting 90 minutes, Sunak repeated his enthusiasm for artificial intelligence, saying developments in the field could help to cure cancer and dementia and boost economic growth.
But he admitted if the technology went unchecked it could cause “large-scale societal shifts” and he wanted to see “guardrails” put in place.
Britain will host an AI safety conference in the autumn but admitted that any talk of an international regulator — similar to the International Atomic Energy Authority — was a “long-distance” prospect.
Sunak also played down the idea of the next King’s Speech — which is due to be the government’s final legislative programme of this parliament — containing AI measures. “We can do lots without legislation,” he said.
Sunak defended civil servants from accusations by some Tory MPs that a Whitehall “blob” was frustrating the will of ministers. Asked if he recognised that expression, the prime minister, said: “No.”
“I’ve always been supported by incredibly diligent and hard working civil servants,” he added.
Meanwhile Sir Chris Bryant, chair of the Commons standards committee, challenged Sunak on why failed to turn up for a debate and vote by MPs about a report that condemned former premier Boris Johnson for lying to parliament.
Bryant said Sunak was willing to “opine” on the rules of cricket following controversy in the second Ashes test between Australia and England, but “not about rule-breaking in parliament”.
Sunak said he missed the Commons vote on the report about Johnson in order to attending a fundraising dinner for an “incredible charity”.
Source: Economy - ft.com
