Reeves public spending spree ‘costs homeowners £820 extra a year'
Rachel Reeves's public spending spree has pushed up the cost of borrowing in a move that is costing homeowners £820 a year, economists have warned.
As the Chancellor prepares to unveil £300bn in new spending pledges in her upcoming review, analysts at Berenberg said households were already counting the cost of the Chancellor's borrowing binge last autumn.
Andrew Wishart, an economist at Berenberg, said Ms Reeves's decision to spend more money on public services and investment meant the Bank of England was unlikely to cut interest rates again this year, extending the pain for millions of mortgage holders.
While Ms Reeves has repeatedly blamed former prime minister Liz Truss for pushing up mortgage costs after the mini-Budget, Mr Wishart said her own spending blitz meant mortgage deals were unlikely to get better this year.
Mr Wishart predicted average mortgage rates would 'likely stabilise at about 4.5pc, whereas they might have fallen to 4pc were the Bank able to continue to lower rates at a quarterly pace'.
With every half a percentage point rise in mortgage rates adding an additional £8.3bn in mortgage interest to bills, he said this would cost the 1.8m homeowners refinancing in 2025 an average of £820 each.
Mr Wishart said this would force the Bank of England to keep interest rates higher for longer.
Policymakers voted to cut interest rates to 4.25pc in May. However, a June cut is looking unlikely, with higher-than expected inflation forcing traders to reassess bets on more rate cuts later this year.
Investors are now betting on two more rate cuts this year. However, Mr Wishart predicted higher spending would prevent the Bank from cutting rates further.
He said: 'The stance of fiscal policy is pretty loose at a time when it probably shouldn't be. We've got unemployment close to historical lows, and a government deficit of over 5pc of GDP last year.
'That is a sign the Government is injecting cash into the economy at a time [when] it is pulling in the other direction to the Bank of England.
'It is quite an important reason why demand is holding up in the early part of this year, and that is a key reason why I think the Bank is going to have to hold off rate cuts until 2026.
'That means mortgage rates aren't going to decline any further, if that is right, because the market will have to take out the cut or two that it has got in for the rest of this year.'
Ms Reeves will on Wednesday set out Whitehall day-to-day and investment budgets until the next election. Labour is hoping that extra spending on health and infrastructure in Red Wall areas will arrest a surge in popularity for Reform.
The Chancellor announced an average £70bn a-year increase in spending in her Budget last October in a move that will swell the size of the state to 44pc of GDP by the end of the decade. This is almost five percentage points higher than its pre-pandemic size.
Ms Reeves has already set out an £87bn increase in public spending over the next two years, with details of a further £300bn between 2026-27 and 2029-30 to be set out on Wednesday.
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