Interest money

Pound rebounds as Truss plans £140bn support package

Capping energy prices to contain inflation: Pound rebounds as Truss plans £140bn support package

Liz Truss’ plans to cap energy bills could mean inflation is already past its peak, economists said last night.

As Britain’s third female prime minister takes office, city experts have suggested the strain on family finances may be starting to ease.

Inflation hit 10.1% in July – the highest in 40 years – and economists spent much of the summer warning that much worse was to come.

Taking the helm: New PM Liz Truss and Governor Andrew Bailey outside the central bank

Citi analysts said last month that inflation could hit 18% while Goldman Sachs warned of a peak of 22%.

But in a dramatic change of tone as reports of Truss’ £140billion energy bailout emerged, economists at HSBC and Barclays said they believe inflation may have reached a peak, while others watered down expectations of accelerating price increases.

The intervention – including support of around £100bn for households and £40bn for businesses – should also ease recession-related concerns.

And it could ease pressure on the Bank of England and its under-fire Governor Andrew Bailey as they raise interest rates to bring prices under control.

Elizabeth Martins, senior economist at HSBC, said Truss’ price cap could prove a “game changer”, adding: “It would be expensive, but if it were to freeze the cap at current levels it could even mean that inflation has already peaked.’

This contrasts with recent predictions that inflation could even exceed 20% thanks to soaring wholesale gas prices as Russian President Vladimir Putin chokes off gas supplies to Europe.

Markets were bullish on the outlook for the cost-of-living assistance package. The beleaguered pound, trading at near two-and-a-half-year lows, climbed above $1.16 against the dollar in early trading before falling back.

Borrowing costs are soaring

Government borrowing costs soared yesterday as investors worried about the impact of Liz Truss’ plans on the country’s creaking finances.

The yield on ten-year government securities – the interest the government pays on the tranches of debt it issues to raise funds for expenses it cannot cover through tax – hit 3.147%.

This is the highest level since 2011.

This effectively means that investors demand higher interest rates to be able to lend in the UK.

Yields on 30-year debt soared to 3.374% in the biggest daily jump since the start of the pandemic in March 2020.

Sanjay Raja, senior economist at Deutsche Bank, said he expected the “vast majority” of the new package to be paid for by borrowing.

On the stock market, Greggs, Wetherspoons and B&Q owner Kingfisher were among the winners, with investors betting they would benefit from the easing of financial pressure on households.

Soaring inflation has prompted the Bank of England to embark on a path of successive interest rate hikes – most recently with a half-percentage-point hike last month and some are talking about an increase of 0.75 points at the officials’ meeting next week.

Catherine Mann, a member of the Bank’s rate-setting committee, argued this week for “swift and forceful” action.

But HSBC’s Martins said the new energy policy would “potentially reduce inflation expectations and the likelihood of a price-wage spiral – the two main reasons the Bank chose to be aggressive in August”.

Barclays chief UK economist Fabrice Montagne also said inflation may have already peaked and by April next year it may have fallen to 5%, rather than the level more than 11% than it had previously forecast.

“By capping energy prices, the government would be a very welcome help to the Bank of England in regaining control of inflation dynamics,” Montagne said.

Berenberg’s Holger Schmieding said: “If households have more money to spend on non-energy goods and services, the UK recession could also be somewhat shallower than we currently expect.”

Capital Economics’ Neil Shearing said the price freeze could give the government time to shake up the energy market – describing the policy as “an expensive band-aid but not a long-term solution”.