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Instant view: Britain's Truss details plan to ease energy shock

Published 08/09/2022, 12:19
Updated 08/09/2022, 13:36
© Reuters. New British Prime Minister Liz Truss leaves 10 Downing Street, in London, Britain September 8, 2022. REUTERS/Peter Nicholls

© Reuters. New British Prime Minister Liz Truss leaves 10 Downing Street, in London, Britain September 8, 2022. REUTERS/Peter Nicholls

LONDON (Reuters) - Britain's new government is freezing consumer energy bills for two years and providing support to businesses from crippling energy costs, new Prime Minister Liz Truss unveiled on Thursday, in a package that could cost about 150 billion pounds ($173 billion).

Truss' first policy announcement since becoming Britain's new leader on Tuesday marks one of the biggest fiscal interventions in post-World War Two British history and will be funded by a huge increase in government borrowing.

The full cost will be set out in a later fiscal update from the finance minister.

MARKET REACTION:

The pound, which slid to a 37-year low this week, recovered slightly versus the dollar to hit $1.1562 after Truss addressed the British parliament. It was last up 0.2% at $1.1552, having been down half a percent earlier in the day.

The FTSE 250 midcap index hit a session low as Truss spoke, but recovered to be flat on the day at 1205 GMT. The blue-chip FTSE 100 index was little changed.

Oil and gas stocks rallied on relief that the government would not impose a windfall tax.

Investors have been selling British assets heavily in recent weeks, spooked by the scale of Britain's economic challenges and concerns about whether Truss and her new team's approach to cut taxes and raise spending is the right one.

COMMENTS:

GEORGE BUCKLEY, ECONOMIST, NOMURA, LONDON:

"I suspect that the size of the package is probably going to weigh on the minds of MPC (Bank of England's Monetary Policy Committee) members and this is why we've upped our forecast for what the Bank does over the course of the next few months or at least one of the reasons why we've got 50 basis points in the bank next week."

"They really need to do a lot more than that, over the course of the next few months before thinking about loosening policy at some point towards the second half of next year."

"We've revised our forecast now. So things have changed. The Bank is accepting that it needs to raise interest rates by more, so we're looking at (Bank Rate peaking at) 3.75%." 

ROSS WALKER, ECONOMIST, NATWEST MARKETS:

"I think this will tend to boost medium term inflation a little. It increases, not dramatically, some of the pressure on the BoE. We'll get more tightening than would have been the case without this."

"I'm surprised gilt yields have not risen more dramatically over the last day or so, given that it looks like there were no formal costings today. The widely reported figures of 150 billion pounds of extra borrowing in the next two years is a substantial increase. That is going to present challenges in terms of funding."

GUY FOSTER, CHIEF STRATEGIST, WEALTH MANAGER BREWIN DOLPHIN:

"For businesses and households there is still a powerful incentive to economise on energy consumption."

"Inflation will peak lower and fall faster as a result of this policy."

"Businesses have been given a much shorter period of security but should see a welcome reduction from their current uncapped bills. There is plenty of devil-filled detail to emerge on what constitutes a vulnerable industry thereafter."

"By helping consumers, it will mean demand is stronger and the MPC will have to judge whether they still expect the labour market to weaken. For now, it is too tight and remains a source of inflationary pressure. Notwithstanding the bigger driver from energy bills."

HUGH GIMBER, GLOBAL MARKET STRATEGIST, JPMORGAN ASSET MANAGEMENT, LONDON:

"The scale of the fiscal intervention announced today is huge, but so is the size of the problem facing UK households and businesses...Medium-term solutions will need to focus on overhauling the energy mix, but an immediate response was absolutely essential to shield consumers and corporates from the full effects of this shock.

"Today’s announcement has varied implications for the inflation trajectory. The good news for the Bank of England is that the peak in inflation is now likely to be lower, with the risk of another surge in energy bills next January now having been taken off the table.

"The less good news is how today’s measures could reinforce stickier price pressures outside of the energy complex, particularly given the untargeted nature of the support. As a result, the Bank of England will likely still feel under immense pressure to prove its commitment to returning inflation, and a 75 basis point rate hike next week is a very real possibility."

JAMES SMITH, ECONOMIST, ING:

"Short term, this will bring inflation down a bit but maybe over a two-year horizon it pushes it up a little bit."

DANNI HEWSON, FINANCIAL ANALYST, AJ BELL:

"The FTSE 250 and FTSE 350 fell and that is because the support for business is just six months and six months is not enough time for businesses to plan.

"The outlook doesn't look great for retail and for those public facing services that rely on consumers to keep spending because although we've got this price cap it's still coming at a time when other costs are soaring. "

"The windfall tax thing is why we've got the FTSE 100 up, whereas you've got the mid cap down. It does impact markets for the likes of BP (LON:BP), Shell (LON:RDSa), and Centrica (LON:CNA) and this obviously is going to be a relief to them because up until now it was not absolutely, unequivocally said by Liz Truss that there would be no windfall tax."

KENNETH BROUX, CURRENCY STRATEGIST, SOCIETE GENERALE, LONDON:

    "The highlight of the Truss announcement is the energy intervention, expected to curb peak inflation by up to 5 percentage points.

    "For the market, this is the big takeaway. The reason cable (sterling/dollar) has come down so much is not just a strong dollar but also the surge in inflation expectations.

    "So, the UK inflation curve is reacting positively to the headlines and the question now is how the government pays for this. We have to assume they will borrow more and that is a test for investors and the Bank of England.

    "For now if inflation expectation comes down that saves the pound from new lows."

PETER MCCALLUM, RATES STRATEGIST, MIZUHO BANK, LONDON:

"I think for the market it's not too different from the sort of things that were expected, at least in terms of the sorts of things she's doing and the amounts.

"All else equal we'd expect these sort of measures to be supportive of the front end (bond market) and bearish at the back end, so looking for long-term rates to move higher. The difficulty is there's various ways the Treasury might choose to finance this sort of stuff...The more interesting thing going forward would be to get some more comments from BoE (Bank of England) speakers and how they're thinking about this.

"We still think 50 (basis point hike) in September's meeting next week is looking a little bit more likely."

CHIRAG SHAH, CEO & FOUNDER, SME LENDER NUCLEUS COMMERCIAL FINANCE:

"With the newly appointed Prime Minister in place, UK SMEs have been holding their breath until details of Liz Truss’ long-anticipated plans landed. But is it too little too late? While the cap on energy prices is a step in the right direction, it is by no means a silver bullet - UK SMEs remain on-course for a difficult journey ahead.

"With widespread reports of small businesses having no choice but to shut up shop forever under the pressure of rising costs, rigorous financial support is vital. Addressing energy costs was critical, but there are still other hugely impactful cost pressures bearing down on the sector."

ROBERT ALSTER, CHIEF INVESTMENT OFFICER, CLOSE BROTHERS ASSET MANAGEMENT:

"The initial thought is one of immense relief - we knew disposable incomes were going to return to the low levels of the 1980s and there would be a fairly major recession, and this may avert it."

© Reuters. New British Prime Minister Liz Truss leaves 10 Downing Street, in London, Britain September 8, 2022. REUTERS/Peter Nicholls

"It will be really interesting to see where yields end up but I think it will be worth it."

($1 = 0.8675 pounds)

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