Energy price cap to put lid on inflation
Pound bounces back as Truss plans £140bn support package
‘Welcome help to Bank of England’
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 10.1pc in July – the highest for 40 years – and economists have spent much of the summer warning that far worse was to come.
analysts at Citi last month said inflation could hit 18pc while goldman Sachs warned of a spike to 22pc.
But in a dramatic change of tone as reports of Truss’s £140bn 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 £100bn support for households and £40bn 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 20pc 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.
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 wageprice 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 5pc, rather than the level of more than 11pc 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’.