Business

Bank of England governor hails prospect of ‘important’ energy bill clarity in inflation fight

The governor of the Bank of England has told MPs he welcomes the prospect of a “clear policy stance” on tackling the surge in the energy bills, as markets fret over the country’s economy.

Andrew Bailey said it was “important” that a clear way forward emerged following the end of the Tory leadership race which coincided with six weeks of volatile market behaviour.

The Bank’s chief economist Huw Pill added that the reported government intervention on energy bills would help lower inflation.

They made their remarks to the Treasury committee, a month after the Bank issued a dire forecast the UK would enter recession this autumn, with the downturn lasting a year, because of the impact of energy-led inflation on the economy.

However, the landscape is set to shift significantly given that the new Liz Truss-led government is set to announce a massive taxpayer bailout for households and businesses to cancel out further hikes to gas and electricity bills.

Firms have endured multiple-fold increases in bills at a time when the energy price cap has shielded the vast majority of households from the worst of the soaring wholesale costs, exacerbated by Russia’s war in Ukraine.

The average annual cap is set to rise to £3,549 from October from the current level of £1,971 but the government is to confirm this week a package, that could cost £150bn under some estimates, to freeze bills.

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It would be achieved through government borrowing to effectively place a cap on wholesale prices which are expected to surge further as winter hits due to supply shortages on the continent.

Sparing households from more immediate energy bill pain should provide a limited boost to the economy in terms of spending power – a situation that will be aided by the promise of Truss tax cuts to come.

But both sets of measures will place greater strain on the public finances, already stretched by COVID era support, with the promise of tax rises or spending cuts to come in the years ahead once the crisis is over.

The Bank of England, which raised Bank rate by 50 basis points to 1.75% last month, is due to make its next rates decision next week.

Both Mr Bailey and Mr Pill said they could not offer much comment on the impact of an energy policy that was yet to be announced by the government.

But Mr Pill added: “One of the things that does seem to be under consideration … is a change to the relationship between gas prices and retail gas prices in a direction that will lower headline inflation, relative to what we were forecasting.”

The governor told MPs: “It’s not for us to comment on what fiscal policy will be and we will wait and see what it is…but I do very much welcome the fact that there will be, as I understand it, announcements this week because I think that will help to, in a sense, frame policy and that’s important.

“It’s important that there is a clear way forward on policy… That will be important for markets to understand what is going to happen.”

Under questioning from committee members, Mr Bailey said that the recent assault on the pound, which has seen sterling hit its lowest level against the dollar for 37 years, was mainly down to dollar strength as international currencies were all struggling against the world’s reserve currency.

The dollar is a traditional safe haven in times of economic stress.

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