Liz Truss’s plan to freeze energy prices would prevent inflation from scaling to its highest level since 1980, the Bank of England’s top wonk said today.
Huw Pill, the monetary authority’s chief economist, told the House of Commons Treasury Committee the new prime minister’s cost of living support package would “weigh on inflation”.
Pill added a cap on bills would prevent inflation from reaching the 13.3 per cent inflation peak the Bank projected in August.
At the time, that forecast was one of the most hawkish among economists.
However, wholesale energy prices have since soared even higher, prompting some to warn inflation may pass 22 per cent.
The City scaled back its bets on the Bank hiking interest rates 75 basis points at its meeting next Thursday after the comments.
However, investors are still pricing in a more than 50 per cent probability of a supersized move, which would be the biggest hike since 1989.
Rates have already scaled from a record low 0.1 per cent to a 13-year high of 1.75 per cent.
That rapid monetary tightening has been sparked by inflation kicking to a 40-year high of 10.1 per cent, more than five times the Bank’s two per cent target.
CPI inflation has climbed to a 40-year high
Experts have warned keeping freezing energy bills is likely to embed high inflation in the UK over the long run by stimulating household spending and disincentivising energy consumption.
Liz Truss is tomorrow set to announce plans to cap energy bills at around £2,500 and provide support for businesses grappling with sky-high gas prices at a cost to the taxpayer of around £120bn.
Pill fired a warning shot to the new prime minister, saying the Bank is “here to ensure [fiscal policies] don’t generate inflation”.
Newly anointed chancellor Kwasi Kwarteng told Bank governor Andrew Bailey today that the government intends to cut the UK’s debt pile over the medium.
Truss’s cost of living package is expected to be funded through a short-term borrowing surge.
Analysts said funding the package through borrowing will send UK government debt yields higher and heap even more pressure on the pound, which today sunk to its lowest level against the US dollar since the mid 1980s.
A borrowing bump means “questions will be asked about the UK’s reliance on the ‘kindness of strangers’,” James Smith, developed markets economist at ING, said in a nod to former Bank chief Mark Carney’s quib at how Britain funds its trade deficit.
Britain has long had a trade deficit – it buys more than it sells – meaning it has to rely on investors lending money for imports.
The post Liz Truss energy price freeze would peg inflation, BoE chief economist says appeared first on CityAM.
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