The pound hovered near its weakest levels since 1985 on Thursday, reflecting the scale of the economic challenge facing new British Prime Minister Liz Truss as she prepares to unveil an emergency power package.
Truss must give details during the morning of the state intervention to protect homes and businesses from skyrocketing energy bills. Government experts said the total gross cost over two winters could reach £150bn.
Before his statement, Simon Clarke, promotion secretary, described the package as “a great attempt to draw a line and provide energy certainty to everyone in this country on energy use in the medium term.”
In comments to Sky News, he added: “If we don’t act, if we don’t protect the economy against shock of the size and scale that we are talking about, there will be enormous damage.”
The package will be financed with government loans, increasing demand in the economy at a time when inflation is above 10 percent; bond markets are already nervous about rising interest rates.
Asked whether the level of government bond sales could become “indigestible” if the government took on too much debt, Bank of England Governor Andrew Bailey said the bank did not intend to destabilize markets. “Our team is keeping this very closely under consideration,” he said.
Huw Pill, chief economist at the BoE, made it clear that the bank would have to raise interest rates in light of higher medium-term inflationary pressure from government actions, but did not say by how much rates should be raised.
Markets took the BoE’s reluctance to be specific as a dovish signal and sold sterling.
The pound sank to as low as $1.1406 on Wednesday, according to Bloomberg data, below the fallout from the 2016 Brexit vote and rising above the depths of March 2020 as global markets rallied in response to the coronavirus crisis. COVID-19. The pound falls 15% against the dollar this year.
After paring its declines later in the session, sterling fell lower during Thursday morning trading, shedding 0.3 percent to trade at $1.149.
Chris Turner, global head of markets at ING, the investment bank, said concerns about the level of borrowing meant “we don’t think sterling is particularly cheap at these levels”.
Kwasi Kwarteng, the new foreign minister, met with Bailey on Wednesday to try to demonstrate harmony and as much coordination as possible between monetary and fiscal policy.
Kwarteng told the leading figures in the city that would impose fiscal discipline “in the medium term”. Bailey told MPs there was little that could be done to prevent the UK from slipping into recession this year, saying “it will be overwhelmingly caused by Russia’s actions and the impact on energy prices”.
Truss’s emergency package will cap average household electricity bills at around £2,500 a year at an estimated cost of £90bn over two years, with the commercial element costing perhaps £60bn. Higher wholesale gas prices would make the bill higher.
In the coming months, Truss wants to persuade nuclear and renewable generators to voluntarily agree to new 15-year contracts at fixed prices well below current rates, giving them profits tied to hugely inflated gas prices.
Ministers have also said the intervention will reduce the official rate of inflation by keeping energy prices low, reducing the annual cost of government borrowing.
Truss told MPs on Wednesday that she would not seek to recoup part of the cost of the energy bailout by imposing a new windfall profits tax on energy companiesdespite Labor opposition demands for such a rate.
“I am against a windfall tax,” she said in her first appearance in the House of Commons since becoming prime minister. “I think it’s wrong to stop companies from investing in the UK, just when we need to grow the economy.”
One senior Conservative official put it bluntly: “All people care about is fixing their energy bill. It doesn’t matter how you pay.”
A person who has been in close talks with Truss’s camp in recent weeks said the prime minister was planning “big symbolic announcements” to show she was taking steps to improve Britain’s security of supply.
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These would include lifting the moratorium on fracking for shale gas in England and greenlighting a new round of North Sea oil and gas licenses.
Energy industry executives also await announcements on gas storage, offshore wind power and the resolution of financing problems for new nuclear plants.
Patrick Fragman, chief executive of nuclear company Westinghouse, which wants government support to develop the Wylfa project in Wales, said they expected an early commitment from the Truss team.
“The new UK government cannot wait too long to make decisions on the future backbone of power generation in the country,” he said.
An energy industry executive said Truss’s plans would also involve a regulatory shake-up targeting Ofgem, which has been criticized for its handling of the energy crisis, but said the regulator would not be removed.
Kwarteng wants, in particular, to support small businesses and energy-intensive users, such as steel and ceramic companies; it is being debated whether to make the support universal for all companies.
Officials have also talked about a possible loan scheme that could be offered to businesses, similar to the Covid support program devised by former Foreign Minister Rishi Sunak.
Reporting by George Parker, Chris Giles, Katie Martin, Nathalie Thomas, Daniel Thomas, Jim Pickard, and David Sheppard