Mortgage Stress Likely To Worsen, Says IMF

UK mortgage payers grappling with the most expensive home loans in 15 years have been warned by the International Monetary Fund to brace themselves for still higher borrowing costs over the coming months. With pay growth registering its fastest growth since modern records began more than two decades ago, the IMF used its annual health check on the economy to back the Bank of England in whatever tough action it deems necessary to bring inflation under control.

- Kalyeena Makortoff, Larry Elliott

The IMF issued its warning on a day when two-year fixed mortgage rates hit their highest level since the global financial crisis in 2008 - and MPs on the Treasury committee were told by mortgage lenders that more mortgage borrowers were likely to face financial stress over the coming months.

Since December 2021, Threadneedle Street's monetary policy committee has raised interest rates from 0.1% to 5% in 13 successive upward moves, with some in the City predicting a further 0.5 point rise in August, after official figures showing annual regular pay growth of 7.3%.

"Should inflationary pressures show signs of further persistence, the [Bank of England's] policy rate may have to be raised further and would need to remain higher for longer to durably lower inflation and keep inflation expectations anchored," the IMF said.

The Bank's governor, Andrew Bailey, fuelled speculation in the City that official interest rates might eventually rise above 6% - a move that would push mortgage rates well over 7% - when he used a speech on Monday to warn that wage and price increases at their current levels were not consistent with hitting the government's inflation target of 2%.