Here are this week’s highlights in the UK economy.
PM announces energy cap: Liz Truss is sworn into office while Kwasi Kwarteng was appointed chancellor of the exchequer. During her speech on Thursday, Truss highlighted her plans to freeze energy price hikes to mitigate surging power costs in UK households. Kwarteng, on the other hand, will be meeting regularly with BOE Governor Andrew Bailey to discuss measures to curb surging inflation.
The pound further weakens: The pound plunged to £0.8701 (-0.4%) on Wednesday, its lowest level since 1985. The BOE blames the weak UK economic outlook and stronger US dollar for the weakening sterling.
UK mourns the Queen’s passing: The country enters into 12 days of mourning following the passing of the Queen. Banks, shops and the stock market suspended their operations on the day of her death out of respect. The bank holiday and business shutdown will also be observed during her burial. The parliament will also be cancelled next week but this won’t delay the energy price guarantee support package, which will push through in October.
ECB hikes rate: The European Central Bank (ECB) raised its benchmark interest rate to 0.75%. This follows the July hike from -0.5% to zero, its first raise since 2012. European inflation is currently at 9.1%, which the ECB is trying to tame through its monetary policies.
Among the inspirations for repackaging the country into Cool Britannia were the popularity of the creative industries and a promising economy that experienced record growth. Now, more than 30 years since the renewed sensation was proclaimed by the New Labour, everything seems far off from the heyday of the UK economy marked by low inflation, low levels of unemployment and higher productivity before the global financial crisis hit in the 2000s.
Way before Truss took office on Tuesday, she already inherited a recovering economy in the midst of a pandemic marred by escalating energy costs, the Ukraine-Russia war, soaring inflation, and climate change, among others. Her energy freeze package will certainly reduce inflation but by how much and for how long remain in question. More so, a recession is likely on the way as Russia insists on cutting its gas supplies throughout Europe while the cost of living continues to spiral.
Industry analysts forecast that without Truss’ intervention, the energy cap will reach £3,549 by October and will further increase to £5,390 by the start of next year.
While the Treasury believes that the energy bill cap could curb inflation by up to 5 percentage points, this will likely force the BOE to raise interest rates next week, which we expect to be between 50 to 75 basis points.
Further interest rate hikes by Threadneedle Street will eventually slow down the surging growth in housing prices where affordability has worsened during the pandemic. The Office for National Statistics reports that house prices rose 7.8% year over year in June, with an average UK house already costing higher by £20,000.
This means that those who are planning to purchase their homes must swiftly act now in anticipation of higher interest rates in the coming months. In addition, mortgage owners on a variable rate will be hit with the expected interest rate hike, which will add around £395 to their mortgage bills each year.
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