Inflation will hit 15% next year if Chancellor Jeremy Hunt scraps the energy price cap and leaves millions of families exposed to a surge in bills, economists have warned.
Analysts at Abrdn said the decision to withdraw the universal energy price guarantee next April would put inflation on course to rise at the fastest rate since 1980, unless another subsidy is introduced.
The chancellor is to end a guarantee that caps average annual energy costs at £2,500 early, instead of continuing it for two years as initially planned, pushing typical bills over £4,000 for many from April
City economists have sharply revised up their inflation forecasts in the wake of Mr Hunt's decision.
Luke Bartholomew, senior economist at Abrdn, an asset manager, told The Telegraph that changes to Government policy posed a dilemma for Bank policymakers.
He said: “The interesting question will be what the Bank does now.
“It has to base its forecast on stated policy intention, so if the Government is saying that it will remove energy support, the inflation profile will look quite bumpy.”
Rates fears ease
Meanwhile, the deputy governor of the Bank of England has suggested that interest rates may not rise by as much as feared as the economic outlook darkens and a recession looms.
Ben Broadbent hinted that rates are unlikely to hit 5.25% as predicted by traders given the damage this would inflict on the economy.
There are concerns that rates at that level would wipe 5%, or £114billion, off the economy.
Financial markets lowered their expectations for interest rates after the speech. The Times said investors are now pricing in an 85% chance of a rise of 0.75 percentage points to 3% at the next meeting on November 3.
FTSE 100
The pound rose against the dollar and government borrowing costs dipped as the markets reacted to Prime Minister Liz Truss's resignation.
Sterling hit $1.13 as the Ms Truss made her announcement and rose higher in the afternoon before falling back to $1.12.
The UK's top share index, the FTSE 100, was 38-points at 6,905 points shortly after opening this morning, following yesterday's 18-point rise.
This was a reaction to the latest Office for National Statistics (ONS) figures for public sector finances out this morning show that public sector net borrowing is at a multi-year high, and likely to climb further.
Brent crude futures were 0.45% higher at $92.80 a barrel.
Companies reporting today
The following companies are reporting this morning:
- InterContinental Hotels Group - Q3 Trading Statement
- London Stock Exchange Group - Q3 Trading Statement
- Verizon - Q3 Trading Statement