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Pound bounces back as Truss plans £140bn support package

Energy price cap to put lid on inflation: Pound bounces back as Truss plans £140bn support package

Plans by Liz Truss to cap energy bills may mean inflation has already passed its peak, economists declared last night.

As Britain’s third female Prime Minister took office, City experts suggested pressure on family finances may be starting to ease.

Inflation hit 10.1 per cent in July – the highest for 40 years – and economists have spent much of the summer warning that far worse was to come.

Taking the helm: New PM Liz Truss and governor Andrew Bailey in front of the central bank

Analysts at Citi last month said inflation could hit 18 per cent while Goldman Sachs warned of a spike to 22 per cent.

But in a dramatic change of tone as reports of Truss’s £140billion energy bailout emerged, HSBC and Barclays economists said they believe inflation may have peaked, while others watered down predictions of how much faster prices will rise.

The intervention – including around £100billion support for households and £40billion for businesses – should also dampen recession worries. 

And it may ease pressure on the Bank of England and its under-fire governor Andrew Bailey as they ratchet up interest rates to bring prices back under control.

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

It contrasts with recent predictions that inflation could even top 20 per cent thanks to wholesale gas prices being sent soaring as Russian president Vladimir Putin chokes off Europe’s gas supplies.

Markets were upbeat on the prospect of the cost of living relief package. The beleaguered pound, trading at near two-and-a-half year lows, climbed above $1.16 against the dollar in early trading before easing back.

Borrowing costs soar 

Government borrowing costs soared yesterday as investors fretted over the impact of Liz Truss’s plans on the nation’s creaking finances.

The yield on ten-year gilts – the interest the Government pays on parcels of debt it issues to raise cash for spending it cannot cover by taxation – rose as high as 3.147 per cent.

That was the highest level since 2011.

It effectively means investors are demanding increased interest rates in order to lend to the UK.

Yields on 30-year debt climbed to 3.374 per cent in the biggest daily jump since the beginning of the pandemic in March 2020.

Sanjay Raja, senior economist at Deutsche Bank, said it expected the ‘vast majority’ of the new package to be paid for through borrowing.

On the stock market, Greggs, Wetherspoons and B&Q-owner Kingfisher were among the winners as investors bet that they would benefit from the financial squeeze on households being eased.

The surge in inflation has prompted the Bank of England to embark on a path of successive interest rate hikes – most recently with a half percentage point increase last month and some talk of a super-size 0.75 point rise when officials meet next week.

Catherine Mann, a member of the Bank’s rate-setting committee, this week argued in favour of ‘fast and forceful’ action.

But HSBC’s Martins said the new energy policy ‘would potentially reduce inflation expectations and the likelihood of a wage-price spiral – the two key reasons why the Bank chose to get forceful in August’.

Barclays chief UK economist Fabrice Montagne also said inflation may have already peaked and that by April next year it may have sunk to 5 per cent, rather than the level of more than 11 per cent it previously forecast.

‘By capping energy prices, the Government would provide much welcome help to the Bank of England in regaining control over inflation dynamics,’ Montagne said.

Holger Schmieding at Berenberg 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 project.’

Neil Shearing at Capital Economics said the price freeze could buy the Government time to shake up the energy market – describing the policy as ‘an expensive sticking plaster but not a long-term solution’.

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