September 30, 2022
Pound sinks as markets digest scale of economic challenge of truce

The pound has fallen to its weakest level since 1985, reflecting the daunting scale of the economic challenge new Prime Minister Liz Truss faces as she prepares to unveil an emergency energy package.

The truce will detail state interventions to protect homes and companies from rising electricity bills on Thursday. Government insiders said the total gross cost could reach £150bn over the two winters.

Truss told lawmakers she would “ensure people to make sure they are able to recover from this winter”, but ministers were trying to finalize details of support for the business sector on Wednesday.

The package will be funded by government borrowing, adding to demand in the economy at a time when inflation is above 10 per cent; Bond markets are already nervous about rising interest rates.

Asked whether the level of government bond sales could become “indigestible” if the government was also borrowing too much, Bank of England Governor Andrew Bailey Told The bank did not intend to destabilize the markets. “Our team is looking at it very closely.

BoE’s chief economist, Huw Pill, made it clear that the bank would have to raise interest rates in light of higher medium-term inflationary pressures from government actions, but he was not attracted to how far the rate hike needed to be.

The market saw the reluctance of the BoE to be conspicuous as a sign and sell sterling. According to data from Bloomberg, the pound fell to $1.1406, the lowest since the 2016 Brexit vote and crossed the depths of March 2020 when global markets rebounded in response to the COVID-19 crisis. Sterling down 15 percent against dollar this year.

Chris Turner, global head of markets at investment bank ING, said concerns about lending levels meant that “we don’t think sterling is particularly cheap at these levels”.

Quasi Quarteng, the new chancellor, met with Bailey and attempted to demonstrate as much harmony and coordination between monetary and fiscal policy as possible.

Quarteng told key city figures he would impose fiscal discipline “in the medium term”. Bailey told lawmakers that little could be done to prevent Britain from falling into recession this year, adding that it would be “heavy because of Russia’s actions and the impact on energy prices”.

The emergency package of the truss, which will be announced on Thursday, will cap average household electricity bills at £900bn over two years at an estimated cost of around £2,500 a year, with the commercial element probably costing £60bn. Higher wholesale gas prices will push up the bill further.

In the coming months, Truss wants to persuade Nuclear and Renewable Generators to voluntarily take on new 15-year contracts at fixed prices far below the current rates, which gives them profits linked to highly inflated gas prices.

Ministers also say the intervention will reduce the official inflation rate by lowering energy prices, lowering the annual cost of government borrowing.

Truss told lawmakers that she would not try to recover some of the cost of the energy bailout by imposing a new unexpected tax on energy companies, despite Labor opposition’s demands for such a levy.

In his first appearance in the House of Commons since becoming prime minister, he said, “I am against the unexpected tax.” “I believe it is the wrong thing to stop companies from investing in the United Kingdom when we need the economy to grow.”

A senior Conservative official said bluntly: “All people care about is their energy bill. How it is paid does not matter.”

A person who has been in close talks with the Truss camp in recent weeks said the prime minister was planning “big symbolic announcements” to show that he would take action to improve the security of Britain’s supplies. Was getting it done.

These would include lifting the ban on fracking for shale gas in England and the greening of a new North Sea oil and gas licensing round.

Energy industry executives are also expecting the announcement to resolve financing issues for gas storage, offshore wind and new nuclear plants.

Patrick Fragman, chief executive of nuclear company Westinghouse, which seeks government support to develop the Wylfa project in Wales, said he was expecting an early commitment from Truss’s team.

“The new UK government cannot wait too long to make a decision regarding the future backbone of electricity generation in the country,” he said.

An energy industry executive said the truce’s plans would also include a shake-up of regulation aimed at the offgame – which has come under fire for its handling of the energy crisis – but said the regulator would not be scrapped.

Quarteng specifically seeks to support small businesses and intensive energy users such as steel and ceramic companies; There is debate over whether to make support universal for all companies.

Officials have also talked about a possible loan scheme that could be given to businesses, similar to the Covid assistance program devised by former chancellor Rishi Sunak.

Reporting by George Parker, Chris Giles, Katie Martin, Nathalie Thomas, Daniel Thomas, Jim Picard, David Shepard

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