The pound hovered close to its weakest levels since 1985 on Thursday, reflecting the scale of the economic challenge facing Britain’s new prime minister Liz Truss as she prepares to unveil an emergency energy package.
Truss is due to give details during the morning of the state intervention to shield households and companies from soaring energy bills. Government insiders said the total gross cost over two winters could hit £150bn.
Ahead of her statement, Simon Clarke, levelling up secretary, described the package as “a major attempt to draw a line and provide energy certainty for everybody in this country about energy usage in the medium term.”
In comments to Sky News, he added: “If we fail to act, if we don’t protect the economy against the shock of the size and scale we are talking about, then there is going to be enormous damage.”
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 were borrowing a lot, Bank of England governor Andrew Bailey said the bank did not intend to destabilise markets. “Our team keeps this under very close consideration,” he said.
Huw Pill, BoE chief economist, made it clear the bank would have to raise interest rates in light of higher medium-term inflationary pressure from the government’s actions, but he would not be drawn on how far rates needed to rise.
Markets took the BoE’s reluctance to be specific as a dovish sign and sold sterling.
The pound sank as low as $1.1406 on Wednesday, according to data from Bloomberg, lower than the aftermath of the Brexit vote of 2016 and exceeding the depths of March 2020 when global markets convulsed in response to the Covid-19 crisis. Sterling has fallen 15 per cent against the dollar this year.
After trimming its declines later in the session, sterling slipped lower during Thursday morning dealings — losing 0.3 per cent to trade at $1.149.
Chris Turner, global head of markets at ING, the investment bank, said concerns about the level of borrowing meant that “we do not think sterling is particularly cheap at these levels”.
Kwasi Kwarteng, the new chancellor, met Bailey on Wednesday to try to demonstrate harmony and as much co-ordination between monetary and fiscal policy as was possible.
Kwarteng told leading City figures that he would impose fiscal discipline “over the medium term”. Bailey told MPs there was little that could be done to stop the UK falling into recession this year, saying it would “overwhelmingly be caused by the actions of Russia and the impact on energy prices”.
Truss’s emergency package will cap average household power bills at about £2,500 a year at an estimated cost of £90bn over two years, with the business element costing perhaps £60bn. Higher wholesale gas prices would push the bill higher.
In the coming months Truss wants to persuade nuclear and renewable generators to voluntarily take new 15-year contracts at fixed prices well below the current rates, which give them profits linked to vastly inflated gas prices.
Ministers have also said that the intervention will reduce the official inflation rate by holding down energy prices, reducing the annual cost of government borrowing.
Truss told MPs on Wednesday that she would not try to recover some of the cost of the energy bailout by imposing a new windfall tax on energy companies, in spite of demands from the Labour opposition for such a levy.
“I am against a windfall tax,” she said in her first appearance in the House of Commons since becoming prime minister. “I believe it is the wrong thing to be putting companies off investing in the United Kingdom, just when we need to be growing the economy.”
One senior Conservative official said bluntly: “All people care about is getting their energy bill sorted. How it’s paid for doesn’t matter.”
One 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 action to improve Britain’s security of supply.
These would include lifting the moratorium on fracking for shale gas in England and greenlighting a new North Sea oil and gas licensing round.
Energy industry executives are also expecting announcements on gas storage, offshore wind and resolving financing issues 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 were hoping for an early commitment from Truss’s team.
“The new UK government cannot wait too long to make decisions regarding the future backbone of power generation in the country,” he said.
One energy industry executive said Truss’s plans would also involve a shake-up of regulation aimed at Ofgem — which has come under fire for its handling of the energy crisis — but said the regulator would not be scrapped.
Kwarteng wants, in particular, to support small businesses and intensive energy users such as steel and ceramics companies; a debate is taking place on whether to make support universal for all companies.
Officials have also talked about a potential loan scheme that could be offered to businesses, similar to the Covid support programme devised by former chancellor Rishi Sunak.
Reporting by George Parker, Chris Giles, Katie Martin, Nathalie Thomas, Daniel Thomas, Jim Pickard and David Sheppard