Freeze on energy bills ‘could be enough to end rising inflation’

Capping annual costs at £2,500 may hold inflation in check but recession is still likely, say forecasters

ENERGY bills will be frozen at £2,500 for households by Liz Truss in an intervention that has stoked hopes that inflation has already peaked.

The Prime Minister’s team has decided the package will be funded by borrowing, rejecting a proposal from energy companies for customers to pay the money back in higher bills over the next decade.

Businesses will also be given support, possibly in the form of frozen energy prices, but the mechanisms and delivery for such a move are much more complicated than protecting consumers and are still being debated.

The freeze on energy bills is expected to last this winter and the next, protecting households until 2024 when the next general election is expected.

This support is expected to significantly lower inflation over the winter and halve the rate by next summer – a “game changer” for family finances – according to forecasters.

Economists at Barclays said inflation was likely to have peaked at 10.1 per cent in July if the new Prime Minister pushes ahead with the plans to freeze bills.

If the proposal goes ahead, the rate should fall back to 5.2 per cent by the

‘You would be optimistic to be very confident you can avoid a recession given what is happening to Europe’

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

middle of next year in a boost for Ms Truss in the run-up to the next election. Forecasters warned inflation could have exceeded 20 per cent next year without action to freeze bills.

An announcement is expected as early as tomorrow. Changes would be rushed through before October, when the price cap is set to increase.

Energy companies previously warned that any change in the price cap would have to be agreed to at least 30 days before it was set to go up, to avoid sending letters to customers containing incorrect information.

Figures close to Ms Truss stressed yesterday that the package remained a work in progress.

The intervention is a marked contrast to Ms Truss’s position during the Tory leadership campaign, which ended on Monday when she defeated Rishi Sunak.

Ms Truss had initially said she did not favour “handouts” to help with the economic crunch, later saying support would be forthcoming if she won but did not provide details.

One senior industry source said they were impressed by the “speed and decisiveness” of the plans and the way the Government had “grasped the scale” of the crisis.

Reducing the peak of price increases will come to the rescue of the Bank of England, which is battling to bring inflation back to its 2 per cent target.

Without action by the Government, households were facing a recession and the biggest drop in living standards in a century. However, experts warned yesterday that the UK is still heading for a recession even if the blow to finances is cushioned.

Torsten Bell, chief executive of the Resolution Foundation, said: “This is an absolutely astronomical hit to household incomes, the country as a whole is getting poorer and this whole discussion is about who gets poorer and when.”

He told MPS on the Treasury select committee that the hit to real incomes is “twice as bad as that which we saw in the financial crisis, so this is totally unprecedented, we haven’t seen anything like that in a century”.

Even with significant help from the Government on bills, “you would be optimistic to be very confident you can avoid a recession given what is happening to Europe”, he said, referencing the effects of the war in Ukraine.

Government borrowing costs jumped yesterday after details of the Prime Minister’s energy plan began to emerge. The yield on 10-year gilts climbed above 3 per cent to hit its highest level since 2011.

Meanwhile economists at Pricewaterhousecoopers warned that the spending power of the average workers’ wages will be down by £2,000 by the end of the year as inflation is on track to hit 17 per cent without more government support.

Andrew Bailey, governor of the Bank of England, is still expected to reinforce the message that more interest rate rises are on the way when he appears in front of MPS on the Treasury committee today. Markets are bracing for the Bank’s key base rate to rise 0.75 per entage points to 2.5 per cent next week – the largest increase since Black Wednesday in 1992. But government action to drastically reduce cost increases will alleviate the pressure for a prolonged period of rate rises.

Fabrice Montagné, Barclays chief UK economist, said: “By capping energy prices, the Government would provide much welcome help to the Bank of England in regaining control over inflation dynamics.

“Peaking and rapidly falling inflation, in a context of a slowing economy, would challenge calls for a faster pace of tightening… prolonged hikes into next year are now less likely”.

Elizabeth Martins an economist with HSBC, said a freeze on energy bills would be a “near-term game changer” and result in the Bank of England “doing less, not more” on interest rates.