The UK has “no alternative” but to hike interest rates in a bid to tackle rising prices, the chancellor has said.
Jeremy Hunt said inflation – the rate at which prices rise – was the “number one challenge we face”.
He said the government would be “unstinting in our support” for the Bank of England “to do what it takes” to slow inflation.
Rising interest rates and mortgage costs weighed on UK economic growth in April.
While the economy grew by 0.2%, the Office for National Statistics said that housebuilders and estate agents had a “poor month”.
Borrowing costs have been steadily rising since December 2021 to a current 4.5% in an attempt to slow consumer price inflation, which stands at 8.7%.
This is more than four times the Bank of England’s 2% inflation target.
In theory, raising interest rates means it is more expensive for people to borrow and they have less money to spend. Consequently, they will buy fewer things which should slow the rate of rising prices.
An increase in interest rates means higher monthly mortgage, credit card and loan payments for some people. Although higher rates should benefit savers – if banks pass it on to their customers.
Asked if he was following former Chancellor John Major’s dictum in 1989 that “if it isn’t hurting, it isn’t working”, Mr Hunt said: “In the end there is no alternative to bringing down inflation, if we want to see consumers spending, if we want to see businesses investing, if we want to see long-term growth and prosperity.
“We have to do everything we can as a government, as a country, to support the Bank of England in their mission to squeeze inflation out of the system.”
The government has no say over interest rates since the Bank of England was granted independence in 1997.
The Bank’s main responsibility is setting interest rates and keeping inflation at or near its target. It faces a balancing act as higher borrowing costs could hamper economic growth.
The UK economy expanded in April after shrinking by 0.3% in the previous month. For the three months to April, the UK economy grew marginally by 0.1%.
The ONS said strong trade in bars and pubs boosted growth.
But it added that said the construction sector had faltered as rising interest rates and mortgage costs made house buyers more cautious. One housebuilder told the BBC people were “holding back” on buying homes.
As interest rates have risen and more people are coming to the end of fixed-rate mortgage deals, some lenders have been withdrawing certain mortgages from the market.
First-time buyers are being met with higher rates, leaving some priced out, and renters are also facing higher costs due to landlords selling up.
Responding to Office for National Statistics figures Tina McKenzie, Policy Chair at the Federation of Small Businesses (FSB), said: “GDP growth in April comes after a tough winter, and will bring some measure of hope to small firms.
“This slight increase was driven by services, up 0.3% in the month, although consumer-facing services in particular remain 8.7% below pre-pandemic output.
“The three-month picture, meanwhile, doesn’t offer much to shout about, only just lifting above zero – although growth of any kind is of course good news.
“Our Small Business Index measured a big uptick in confidence among small firms between the last quarter of 2022 and the first quarter of this year, ending up in lightly negative territory, and we hope this momentum will continue.
“Most small business owners will tell you, however, that it’s far from plain sailing for them at the moment, despite the resilience they’ve shown to date.
“Yesterday’s labour market figures show that wages are rising at a record rate outside pandemic conditions, which makes a base rate rise next week more likely, and will make finance even harder to come by for many small firms looking to invest. This will hold back our recovery, when it is small firms we should be looking to as the way out of the economic doldrums.
“If the Government wants to give small firms a lift, one revenue-neutral measure which would have an immediate effect would be to tackle late payment, to get funds flowing through supply chains.
“Making large corporates publicly responsible for the payment practices in their supply chains would give immediate relief to millions of small firms, and save them time and effort currently spent chasing invoices, improving their productivity.
“Inflation fell in the most recent figures, but is still some distance higher than the 2% target, while elevated prices are proving sticky. With consumer confidence rising but still firmly negative, many small firms are in a precarious position.
“Cutting their fixed costs – by looking at business rates, increasing the VAT threshold, and ensuring that small businesses trapped on high energy tariffs can ‘blend and extend’ their contracts – will relieve margin pressure, and encourage small firms to fulfil their true potential as the engine of recovery.”