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Markets brace for Truss’s energy package; ECB poised for large rate hike – business live | Business

Introduction: UK energy relief package and ECB meeting ahead

Good morning and welcome to our rolling coverage of business, the world economy and the financial markets.

The financial markets are growing more nervous over UK assets as prime minister Liz Truss prepares to announce an emergency energy package to protect consumers and businesses from soaring bills.

The plan, which will be unveiled this morning, could freeze the utility price cap at £2,500 until 2024, rather than the average bill rising over £3,500 next month as planned.

Investors are concerned that the package, which could cost upwards of £130bn, will be funded by higher borrowing. So while it would bring urgently-needed relief this winter, the package could also add to inflation in the medium-term – with prices already rising at over 10% per year.

These fears drove the pound to its lowest level in 37 years yesterday, as it briefly dropped as low as $1.1403. That’s the weakest point against the dollar since Margaret Thatcher was PM – one Thatcherite comparison Truss will not appreciate.

The pound has now shed almost 15% of its value this year – and is a long way shy of its pre-EU referendum levels of almost $1.50.

Dollar strength is another factor – the greenback has hit its highest levels in two decades against the euro and the yen too.

im sorry to keep talking about exchange rates but USD gains have been seriously crazy.

pound falls to its lowest level against the dollar since 1985. pic.twitter.com/d9eLfu8iaJ

— derek guy (@dieworkwear) September 8, 2022

Truss’s pledge to cut taxes to spur growth could also put pressure on the Bank of England to keep interest rates higher for longer.

Concerns about ‘Trussonomics’ helped push UK benchmark borrowing costs to the highest level in over a decade this week, with the yield (or interest rate) on 10-year gilts rising over 3%, meaning it costs more to borrow.

The pound traded at its weakest level since the mid-1980s as Liz Truss took office, while the yield on the UK government’s ten-year bonds reached 3 per cent for the first time since 2014. Both market moves reflect investors’ fears about the country’s darkening economic outlook.

— Ajay Bagga (@Ajay_Bagga) September 8, 2022

Analysts at MUFG Bank have warned that the pound could fall further against the dollar (the £-$ rate known as ‘cable’ in City jargon).

They told clients that Britain’s budget deficit (what the government borrows to balance the books) and current account deficit (the shortfall in imports and exports, and net financial income) are a concern:

  • New PM Liz Truss is set to outline plans for significant fiscal stimulus including further support to combat the energy crisis and lower taxes.

  • New measures will help to improve UK growth and inflation outlook. Normally an improving cyclical outlook and higher rates would encourage a stronger GBP (pound) but structural problems from twin deficits remain a concern as financing conditions tighten.

  • We are not yet confident that the lows are in place for cable as the USD continues to strengthen broadly.

5️⃣ points abt “Trussonomics”
1. It’s potentially a BIG economic shift
2. In the short run “pro-growth” might better be translated as “more borrowing”
3. That implies higher interest rates
4. It depends on investor confidence
5. It may never actually happenhttps://t.co/xoBrCJlenI

— Ed Conway (@EdConwaySky) September 7, 2022

New chancellor Kwasi Kwarteng yesterday tried to calm nervous markets.

At a meeting with top City bank bosses and investors, and Bank of England governor Andrew Bailey, he insisted that the BoE’s indepencence, was “sacrosanct” in the fight against inflation.

Capital Economics predict a price freeze would ‘dramatically lower’ the near-term path of inflation, and mean a less severe recession:

Rather than rise from 10.1% in July to around 14.5% in January, it may mean that inflation peaks around 11.5% in November and falls faster next year. The smaller drag on real incomes means that the recession may be shallower too, perhaps with a peak to trough fall in GDP of around 0.5% rather than 1.0%.

But, by supporting demand, it would boost inflation further ahead, potentially meaning higher borrowing costs:

As such, the risks to our forecast that interest rates will rise from 1.75% now to 3.00% are increasingly on the upside.

Also coming up today

The European Central Bank could announce the largest interest rate increase in its history today, as it grables with record inflation.

Economists predict the ECB could raise borrowing costs by 75 basis points, after the energy crisis drove up euro-area inflation to 9.1% in August, over four times above its 2% target.

IG’s Joshua Mahony warns that such a sharp increase in rates would come with risks:

The risk for the eurozone here is that by setting up a 75bp hike, they create a rod for their own back, with markets expecting similar sized moves as inflation continues to rise.

The Russian decision to shut off all gas exports to Europe provides expectations that energy will continue to drive headline inflation higher, while a declining euro also bring imported inflation. With that upward trajectory for inflation in place, this sharp rise in borrowing costs could come at the expense of fiscal stability in less stable member states such as Italy.

The agenda

  • 7.45am BST: French trade balance for July

  • 11.30am BST: UK energy bill relief package announced

  • 1.15pm BST: European Central Bank decision on interest rates

  • 1.30pm BST: US weekly jobless figures

  • 1.45pm BST: European Central Bank press conference

Key events

Filters BETA

The Labour party are continuing to push for a windfall tax on the energy producers who are making large profits from the surge in wholesale prices.

Renewable energy producers have reportedly agreed in principle to accept new long-term contracts at fixed prices well below current rates.

Those new ‘contracts for difference’ would break the link between electricity from sources such as nuclear, solar and windfarms and the sky-high prices being paid for electricity generated by burning gas in power stations.

In the short term, it could cut bills, as we explained last week:

But the shadow climate change secretary, Ed Miliband, has warned that those long-term fixed-price contracts would “lock in” massive profits for electricity companies:

He told BBC Radio 4’s Today programme:

“This is a proposal from Energy UK, and let’s be clear about this proposal: This would lock in massive windfall profits for these electricity generators.

“Let me explain why: what Energy UK have said is we’ll accept slightly lower prices now, so we can have much higher prices over the following 15 years.

“This would be a terrible deal for the British people, a terrible deal for billpayers.

“It is much better – if there are these unexpected windfalls, and there are – the right thing to do, the fair thing to do, is not to do some dodgy deal with these companies, but to do a windfall tax.”

Lloyd’s of London takes £1.1bn hit from Ukraine war

Julia Kollewe

Julia Kollewe

Lloyd’s of London has warned of a “challenging year” of natural catastrophes, the invasion of Ukraine and inflation as the world’s oldest insurance market took a £1.1bn hit from unrecoverable planes and cargoes related to the war in Ukraine.

The group said it had set aside the sum for customers affected by the conflict, mostly for grounded aircraft, ships trapped in the Black Sea and disrupted exports of cereals and agricultural products from Ukraine and Russia.

Lloyd’s also insures ships transporting grain from Ukraine’s ports under a UN-brokered deal in July. It has worked with the UK government to implement sanctions imposed over the war, including cancelling Russian firms’ insurance cover.

These charts show the daunting economic challenges facing the government, as the cost of living crisis pulls more families into fuel poverty.

The UK energy price cap is set to soar higher without government help

Wholesale gas prices hit record highs this year

UK inflation has hit double-digit levels

More families are falling into fuel poverty

Here’s the full analysis:

Truss’s plan to tackle soaring energy bills could be a make or break moment for her entire premiership, some Tory MPs concede.

Our political team explain:

The new prime minister is expected to announce to MPs that bills will be frozen at about £2,500 a year until 2024 as part of a package of support costing up to £130bn, funded by the taxpayer, as she tries to address the most significant economic crisis in a generation.

Senior Tories predicted the bailout would generate enough goodwill to guarantee her survival in No 10 until at least Christmas, but warned she had a big challenge keeping her deeply divided party in line beyond the new year.

In one move that will cheer some Tory backbenchers, it is understood that Truss will announce an immediate end on a pause on fracking for shale gas, with new drilling potentially beginning within weeks as part of her hydrocarbon-based push for greater energy security.

The practice is hugely controversial – the moratorium was imposed in 2019 because of earthquakes the practice can trigger – and Truss has previously said fracking would only happen in areas where there was local support. It is not known if this would be changed

Truss could lift ban on fracking

Liz Truss’s government could also lift the ban on fracking, as part of its push to control energy markets.

Levelling Up Secretary Simon Clarke has told Sky News this morning that:

“If we want energy sufficiency we have to look at every source including clearly new nuclear, more renewables but we also want to look at technologies like fracking,”

“We have to do so in the most sensitive possible way with community consent at the absolute heart of our policies.

“The net zero commitment that the Government has made by 2050 is critical. But in the near-term we need all kinds of gas as a transition fuel and that is something the Prime Minister will be saying more about.”

The Telegraph is reporting that Truss will scrap the UK’s fracking ban today, and seek to make more use of North Sea reserves.

Restarting fracking wouldn’t deliver extra energy resources in time for this winter, though.

And back in February (before the Ukraine war upended energy markets), now-chancellor Kwasi Kwarteng argued that additional UK production wouldn’t materially affect the wholesale market price.

Please read: thread on energy security 🧵

The North Sea is our single largest source of gas, with the bulk of our imports coming from reliable Norway.
 
Unlike Europe, we’re not reliant on Russian gas.
 
But like others, we are vulnerable to high prices set by markets.
 
(1/9)

— Kwasi Kwarteng (@KwasiKwarteng) February 28, 2022

The wholesale price of gas has *quadrupled* in UK and Europe.
 
Additional UK production won’t materially affect the wholesale market price.
 
This includes fracking – UK producers won’t sell shale gas to UK consumers below the market price. They’re not charities.
 
(4/9)

— Kwasi Kwarteng (@KwasiKwarteng) February 28, 2022

The cost of insuring UK government debt against default has risen to a 27-month high this week – another sign of market nervousness.

Striking: the cost of insuring against a UK sovereign default has ticked up to the highest level for two years.
Based on these so-called credit default swaps, the UK’s risk of default, which used to be in line with Germany, is now up above that of Germany, the US and France. pic.twitter.com/dAgt5AJM32

— Ed Conway (@EdConwaySky) September 7, 2022

As Britain issues its own currency, it should never need to default. The Bank of England can create all the pounds needed to service the debt (although this monetary financing would break central bank independence). But it’s a sign of edginess about the UK’s economic outlook….

…As is this, also from Ed Conway of Sky News.

There are many datapoints the new PM & her team should be pondering over the coming days, but among them should be this one.
Acc to Bloomberg’s index, which measures the pound against a basket of other currencies, sterling has in recent days touched the lowest level IN HISTORY
🧵 pic.twitter.com/If82YK4aQ6

— Ed Conway (@EdConwaySky) September 5, 2022

Introduction: UK energy relief package and ECB meeting ahead

Good morning and welcome to our rolling coverage of business, the world economy and the financial markets.

The financial markets are growing more nervous over UK assets as prime minister Liz Truss prepares to announce an emergency energy package to protect consumers and businesses from soaring bills.

The plan, which will be unveiled this morning, could freeze the utility price cap at £2,500 until 2024, rather than the average bill rising over £3,500 next month as planned.

Investors are concerned that the package, which could cost upwards of £130bn, will be funded by higher borrowing. So while it would bring urgently-needed relief this winter, the package could also add to inflation in the medium-term – with prices already rising at over 10% per year.

These fears drove the pound to its lowest level in 37 years yesterday, as it briefly dropped as low as $1.1403. That’s the weakest point against the dollar since Margaret Thatcher was PM – one Thatcherite comparison Truss will not appreciate.

The pound has now shed almost 15% of its value this year – and is a long way shy of its pre-EU referendum levels of almost $1.50.

Dollar strength is another factor – the greenback has hit its highest levels in two decades against the euro and the yen too.

im sorry to keep talking about exchange rates but USD gains have been seriously crazy.

pound falls to its lowest level against the dollar since 1985. pic.twitter.com/d9eLfu8iaJ

— derek guy (@dieworkwear) September 8, 2022

Truss’s pledge to cut taxes to spur growth could also put pressure on the Bank of England to keep interest rates higher for longer.

Concerns about ‘Trussonomics’ helped push UK benchmark borrowing costs to the highest level in over a decade this week, with the yield (or interest rate) on 10-year gilts rising over 3%, meaning it costs more to borrow.

The pound traded at its weakest level since the mid-1980s as Liz Truss took office, while the yield on the UK government’s ten-year bonds reached 3 per cent for the first time since 2014. Both market moves reflect investors’ fears about the country’s darkening economic outlook.

— Ajay Bagga (@Ajay_Bagga) September 8, 2022

Analysts at MUFG Bank have warned that the pound could fall further against the dollar (the £-$ rate known as ‘cable’ in City jargon).

They told clients that Britain’s budget deficit (what the government borrows to balance the books) and current account deficit (the shortfall in imports and exports, and net financial income) are a concern:

  • New PM Liz Truss is set to outline plans for significant fiscal stimulus including further support to combat the energy crisis and lower taxes.

  • New measures will help to improve UK growth and inflation outlook. Normally an improving cyclical outlook and higher rates would encourage a stronger GBP (pound) but structural problems from twin deficits remain a concern as financing conditions tighten.

  • We are not yet confident that the lows are in place for cable as the USD continues to strengthen broadly.

5️⃣ points abt “Trussonomics”
1. It’s potentially a BIG economic shift
2. In the short run “pro-growth” might better be translated as “more borrowing”
3. That implies higher interest rates
4. It depends on investor confidence
5. It may never actually happenhttps://t.co/xoBrCJlenI

— Ed Conway (@EdConwaySky) September 7, 2022

New chancellor Kwasi Kwarteng yesterday tried to calm nervous markets.

At a meeting with top City bank bosses and investors, and Bank of England governor Andrew Bailey, he insisted that the BoE’s indepencence, was “sacrosanct” in the fight against inflation.

Capital Economics predict a price freeze would ‘dramatically lower’ the near-term path of inflation, and mean a less severe recession:

Rather than rise from 10.1% in July to around 14.5% in January, it may mean that inflation peaks around 11.5% in November and falls faster next year. The smaller drag on real incomes means that the recession may be shallower too, perhaps with a peak to trough fall in GDP of around 0.5% rather than 1.0%.

But, by supporting demand, it would boost inflation further ahead, potentially meaning higher borrowing costs:

As such, the risks to our forecast that interest rates will rise from 1.75% now to 3.00% are increasingly on the upside.

Also coming up today

The European Central Bank could announce the largest interest rate increase in its history today, as it grables with record inflation.

Economists predict the ECB could raise borrowing costs by 75 basis points, after the energy crisis drove up euro-area inflation to 9.1% in August, over four times above its 2% target.

IG’s Joshua Mahony warns that such a sharp increase in rates would come with risks:

The risk for the eurozone here is that by setting up a 75bp hike, they create a rod for their own back, with markets expecting similar sized moves as inflation continues to rise.

The Russian decision to shut off all gas exports to Europe provides expectations that energy will continue to drive headline inflation higher, while a declining euro also bring imported inflation. With that upward trajectory for inflation in place, this sharp rise in borrowing costs could come at the expense of fiscal stability in less stable member states such as Italy.

The agenda

  • 7.45am BST: French trade balance for July

  • 11.30am BST: UK energy bill relief package announced

  • 1.15pm BST: European Central Bank decision on interest rates

  • 1.30pm BST: US weekly jobless figures

  • 1.45pm BST: European Central Bank press conference

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