The pound was near its weakest 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 energy package.
Truss is due to give details in the morning of state intervention to protect households and businesses from rising energy bills. Government experts said the total gross cost over two winters could reach £150 billion.
Before his statement, Simon Clarke, the level secretary, described the package as “a great attempt to draw a line and provide energy security for 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 a shock of the size and scale that we’re talking about, then there will be enormous damage.”
The package will be financed by public borrowing, boosting demand in the economy at a time when inflation is above 10%; bond markets are already nervous about rising interest rates.
Asked whether the level of government bond sales could become “undigestible” if the government took on too much debt, Bank of England Governor Andrew Bailey said the bank had no intention of destabilizing the markets “Our team takes that very seriously,” he said.
Huw Pill, the BoE’s chief economist, made clear the bank would have to raise interest rates in light of higher medium-term inflationary pressure from government stocks, but would not be bold about how high should rates rise.
We don’t think sterling is particularly cheap at these levels
Markets took the BoE’s reluctance to be specific as a conciliatory sign and sold off sterling.
The pound sank to $1.1406 on Wednesday, according to Bloomberg data, below the fallout from the 2016 Brexit vote and off the lows of March 2020 as global markets convulsed in response to the Covid-19 crisis. Sterling has fallen 15 percent against the dollar this year.
After paring its losses later in the session, sterling edged lower in Thursday morning trade, losing 0.3% 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 chancellor, met with Bailey on Wednesday to try to demonstrate harmony and as much coordination between monetary and fiscal policy as possible.
Kwarteng told top city figures he would impose fiscal discipline “in the medium term”. Mr Bailey told MPs that not much could be done to prevent the UK falling into recession this year, saying it “would be largely caused by the actions of Russia 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 business element costing perhaps £60bn. Higher wholesale gas prices would increase the bill.
In the coming months, Truss wants to convince nuclear and renewable generators to voluntarily accept new 15-year contracts at fixed prices well below current rates, which provide them with profits linked to huge inflation in gas prices.
Ministers have also said the intervention will reduce the official inflation rate by keeping energy prices down, reducing the annual cost of public borrowing.
Truss told MPs on Wednesday that he would not try to recoup some of the cost of the energy bailout by imposing a new windfall tax on energy companies, despite demands from the Labor opposition for such a levy.
“I am against an extraordinary tax,” she said in her first appearance in the House of Commons since becoming prime minister. “I think it is wrong to put off companies investing in the UK, just when we need to grow the economy.”
A senior Tory official said bluntly: “All people care about is getting their energy bill fixed. It doesn’t matter how it’s paid for.”
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 he was taking action 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 green-lighting a new round of North Sea oil and gas licences.
Energy sector executives also expect announcements on gas storage, offshore wind and resolving financing issues for new nuclear plants.
Patrick Fragman, chief executive of nuclear firm 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 about the future backbone of power generation in the country,” he said.
An energy industry executive said Truss’ plans would also involve a change in regulation aimed at Ofgem, which has been criticized for its handling of the energy crisis, but said the regulator would not be ruled out.
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Kwarteng wants, in particular, to support small businesses and energy-intensive users such as steel and ceramic companies; a debate is ongoing as to whether support should be universalized 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 chancellor Rishi Sunak.
Reporting by George Parker, Chris Giles, Katie Martin, Nathalie Thomas, Daniel Thomas, Jim Pickard and David Sheppard