Interest rates hike will make Scots families over £2100-a-year worse off in cost-of-living crisis

Yesterday it emerged that some 200,000 Scots borrowers now face hikes in their mortgages of over £200 a year - as the Bank of England hiked base rates to 1% from 0.75% in what is the fourth consecutive increase since December.

Inflation, which is at its highest for 30 years, is set to reach 10% by the end of the year, with fuel, energy and food costs soaring partly due to the Ukraine war which has seen people reining in their spending.

In the latest blow to households it has emerged that the those on variable rate mortgages will see their bills rise by around £12 per month for a £100,000 mortgage. UK Finance, the voice of the banking and finance industry say the average mortgage debt is running at around £140,000.

In the wake of the rate rise and a warning from the Bank of England that the UK economy will shrink this year - unions called for an emergency Budget to help households amid soaring inflation.

The New Economics Foundation (NEF) think tank analysis reveals that the costs of essentials minus interest rate rises, including household energy bills, fuel, clothing and food and drink, for a Scottish family is expected to rise by £2,100 this year. But they say some 1.7m Scots are unable to afford this rise.

Around 1.5m Scots households are to see their energy bills soar by up to £693 a year after the regulator Ofgem hiked the price cap in April by the biggest increase yet.

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From April 1, the three in four customers on default tariffs paying by direct debit saw an increase of £693 from £1,277 to £1971 while the rest who are on prepayment meters - and tend to be among the most vulnerable - have seen a rise of £708 from £1,309 to £2017.

Analysts have predicted it will increase by a further 32% in October.

The think tank warned that it means that middle-income families could be forced to cut back on essentials as the cost of living crisis is set to escalate.

Across the UK, the range of families who will not be able to afford the cost of living increase has now grown to include households on middle incomes of up £33,000 a year before tax.

It called for the creation of a new social security system, or​'living income’, under which no-one can fall below whether they are working or not.

They also called for the return of the £20 universal credit uplift that was scrapped last year, a general funding increase in the benefits system and pegging benefits rises to inflation.

It comes as demands for a windfall tax on Britain’s biggest energy firms intensified when Shell revealed record profits of more than £7 billion in the first three months of the year.

The oil and gas giant made a higher than expected $9.1 billion (£7.2 billion) in the first three months of this year, almost triple the level of last year and 43% up on the previous quarter.

The scale of Shell’s profits — the most it has earned in a quarter — triggered demands for the Government to levy a one-off tax to raise money to ease the cost-of-living crisis.

It follows the £5 billion profit made by rival BP in the same period announced earlier this week.

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The combined total of more than £12bn means that the two giants were making a profit of more than £1,500 a second between them during a period when oil and gas prices were booming as a result of Russia's invasion of Ukraine.

Sam Tims, economist at the New Economics Foundation, said: "The worsening crisis makes clear that we urgently need a bold new way of doing income support to ensure households do not fall into deeper levels of destitution. Poverty limits people’s freedom, restricts education and health outcomes and reinforces the imbalance in our economy.”

Bank of England raised the interest rates to a level not seen since early 2009, in a move designed to cool rocketing inflation which hit 7% in March.

Raising rates makes it more expensive for consumers and businesses to borrow. The idea is this helps cool demand for goods and services, thereby taming prices.

But economists have warned rate rises may have little effect given the rising global oil and gas prices.

The Bank's Monetary Policy Committee (MPC) - which sets rates - also acknowledged there were "risks" in raising rates, and said it would continue to review "incoming data".

The UK economy is now expected to contract by 0.25% in 2022, down from its previous forecast of 1.25% growth. While that would not technically be a recession - defined as two consecutive quarters of contraction - it would leave the UK at a real risk of one.

The MPC has also slashed its growth outlook for 2023 to 0.25%, down from 1%.

Savers will hope that the base rate rise will mean they get better rates on their savings accounts.

But the estimated 2m in the UK and 200,000 in Scotland with variable or tracker rate mortgages are likely to see monthly costs rise imminently. The estimated three in four homeowners with fixed rate mortgages, will see no immediate increase in their monthly repayments, but are likely to find remortgaging more expensive.

Governor of the Bank of England Andrew Bailey said the UK was set for "a very sharp slowdown" but declined to call it a recession.

He also defended raising rates at time when the cost of living is rising, saying that the risk of letting inflation get out of control was higher.

"We have been very careful in our response, taking into account the scale of the shock to the economy."

Trades Union Congress head of economics Kate Bell said it was the wrong time for a rate rise.

"The economy is already slowing down and the rise will further harm growth. And it won’t have much impact on supply side problems like rising energy costs," she said.

Scottish Trade Union Congress general secretary Roz Foyer added: “The Chancellor can – and must – do more to support workers across Scotland. This starts with an immediate windfall tax on the multi-billion-pound pandemic profiteer energy companies, who continue to rake in record amounts on the back of hard-pressed people throughout the country.

“Workers in Scotland didn’t cause this crisis. They shouldn’t be paying for it. A UK Government emergency budget that prioritises those at the bottom – not the top 1% who tend to prop up the Tory party – can achieve this.

“This doesn’t relinquish the Scottish Government of responsibility and we need them to prioritise a real-terms pay rise for public sector workers. For too long, public sector workers – those who were at the frontline during the pandemic– have been undervalued and undercut. In the face of rising energy, taxes and food costs, it would be unimaginable for them to endure further cuts to their wages whilst inflation rises."

Rachel Reeves MP, Labour’s shadow chancellor said: "Rising interest rates and further troubling growth downgrades underline not only how the Tories are failing to tackle the cost of living crisis, but also how poorly they're managing our economy.

“This will seriously worry families across the country already dealing with soaring prices and bills.

"Not only are ministers shrugging their shoulders at the spiralling cost of living crisis, they’ve made it worse by hitting working people and businesses with fifteen Tory tax rises that will further stifle our economic growth.

“They are out of ideas and out of touch."

“With a one-off windfall tax on oil and gas producer profits we can cut household bills by up to £600 and support businesses through the cost of living storm.”

Laura Suter, head of personal finance at investment firm AJ Bell, added: “The move by the Bank’s rate-setters to increase rates lumps even more pain on households struggling with the cost of living crisis.

"The global nature of the drivers of inflation means that this increase to 1% is very unlikely to beat inflation into a hasty retreat, but what it is certain to do is pile more misery on people already having to rely on debt just to pay their bills.”