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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

Energy bill freeze would mean shallower UK recession, but borrowing fears drive up gilt yields – as it happened

Liz Truss United States United Kingdom Pandemic Bank of England Inflation
The London Skyline at dusk, including the Canary Wharf financial district
The London Skyline at dusk, including the Canary Wharf financial district Photograph: ilyas Ayub/Alamy

Closing summary

Time to wrap up

Economists are hopeful that Liz Truss’s planned energy support package can protect the UK economy from a long recession.

Although the details of the plan are yet to be announced, City experts predict that freezing energy bills for consumers could mean a shallower downturn.

Capital Economists estimate that inflation could now peak in October, rather than surging again in January.

Liz Truss is expected to announce plans to freeze energy bills at about £2,500 a year, with households also receiving the previously announced £400 rebate.

Truss is also reportedly pondering a scheme to freeze wholesale gas prices for businesses, at an estimated £40bn cost.

The package could mean the Bank of England’s recent gloomy economic forecasts, for a recession lasting more than a year, could be too pessimistic.

Torsten Bell of Resolution Foundation told MPs that support for households and businesses would help the economy, but added:

“I think you’d be optimistic to be very confident you can avoid a recession, given what’s happening to Europe.”

Fears that the plan could drive up the budget deficit have pushed UK borrowing cost sharply higher. The benchmark 10-year gilt yield, which rises when prices fall, surged over 3% to an 11-year high.

The pound got a small boost, though, rising from yesterday’s 29-month lows to around $1.16.

Ministers are also pondering a windfall tax raid on energy producers, to help fund support to bring down bills.

Parliaments’ BEIS committee also heard that the cost of living crisis was causing real misery.

Shares in UK retailers, and consumer-facing firms such as pizza-delivery firm Domino’s and high street bakery chain Greggs rallied, on hopes that consumers will have more to spend if energy bills are capped.

Pub chains also had a good day, as their energy bills could be lowered under that £40bn package of business aid under consideration.

In other news….

Building firms suffered a squeeze on activity for a second month in a row during August as new orders slowed to their lowest level since the summer of 2020 in the latest sign that a UK recession is looming.

More shared “banking hubs” are to be rolled out across the UK to help communities hit by branch and ATM closures to get continued access to cash.

Go-Ahead, one of the UK’s biggest transport companies, has been hit by a cyber attack affecting software used to schedule bus drivers and services.

A second UK train operator has said it will slash its schedules because of sickness and “industrial relations issues”, cutting some services by almost a quarter. TransPennine Express is to bring in an emergency timetable from next Monday.

Liz Truss is addressing the nation now, from outside Downing Street, and promising to take action on energy bills ‘this week’.

Our Politics Liveblog has all the action.

Updated

UK gilt yield curve inverted on economic fears

The UK bond market is also flashing warning signs that Britain could fall into recession.

The yield, or interest rate, on two-year UK government bonds is above the equivalent 10-year gilt yield, despite today’s selloff in benchmark bonds.

In normal times, investors would seek a higher rate of return on longer-dated bonds, to reflect the additional uncertainty. But tonight, two-year gilts are yielding 3.159%, while 10-year gilts are trading around 3.5%.

That is traditionally a sign that investors are expecting lower growth in the future, as the Evening Standard explains:

The yield curve inverted in this way just before the 2008 financial crash, as investors who saw that trouble was coming parked money with the government for the long-term.

The yield curve was also ‘inverted’ last week, and the US bond market has shown similar moves, on concerns that higher interest rates could cause a recession across the Atlantic.

Liz Truss has become prime minister at a time when storm clouds are gathering over the global economy, as well as at home.

In August, global economic activity contracted for the first time since June 2020 – during the first wave of Covid-19.

New order inflows declined and international trade volumes fell, with downturns in the global business services, consumer goods, consumer services, intermediate goods and investment goods sectors.

Updated

Torsten Bell of Resolution Foundation makes an important point – it’s hard to put a price tag on an energy bill freeze, as wholesale gas prices are not in the UK government’s control:

The bond selloff is keeping the financial markets on edge, reports Michael Hewson of CMC Markets:

In the UK, it is being reported that new PM Liz Truss is bringing forward a £170bn package of measures to support business and consumers, freezing energy prices at their current levels for two years.

This has prompted a sharp rise in UK gilt yields to 11-year highs.

Nonetheless these reports have helped give a lift to consumer discretionary pushing the likes of JD Sports, Kingfisher and Next higher.

U.K. benchmark borrowing costs hit their highest level in more than 11 years on Tuesday as markets worried that new Prime Minister Liz Truss’s plans to combat Britain’s cost-of-living crisis would mean a sharp increase in supply of government debt, says Marketwatch.

Fears of higher borrowing hit UK gilts

British government bonds are suffered a heavy sell-off as markets focus on the extra borrowing new prime minister Liz Truss may need to cut household energy bills.

The selloff – pushing UK 10-year borrowing costs to the highest in over a decade - comes as Liz Truss is expected to announce plans to freeze energy bills at about £2,500 a year.

That bill won’t be claw back through customers’ future bills, leaving the taxpayer to pick it up instead – meaning higher borrowing.

Our political editor Pippa Crerar explains:

The £400 universal handout to be given to households this autumn is expected to be factored in, so the energy price cap would effectively be maintained at about the current £1,971 rate.

Conservative sources confirmed that wholesale gas prices could be capped, meaning the new prime minister’s plan would also help thousands of small businesses teetering on the brink of collapse.

The scheme, which could cost as much as £90bn, would be paid for by extra borrowing, after Kwasi Kwarteng, expected to be the new chancellor, made the case for some “fiscal loosening”.

It suggests that Truss has rejected the leading proposal from the Treasury and energy firms to freeze bills and add the cost over the next few years to customers’ bills. Critics had warned it could be difficult to justify when energy firms were making huge profits.

The selloff has driven UK gilt yields over a previous high of 3.092% set in 2014 to peak at 3.125%, the highest since July 2011.

Five-year gilt yields have now jumped to the highest since August 2009 at 3.061%, up 15 basis points on the day, while 30-year yields are at their highest since July 2014 at 3.411%.

Updated

The pound is losing its earlier gains too, sliding back to $1.15:

10-year gilts are continuing to weaken, pushing up the yield on the benchmark bonds to 3.1% – the highest since 2011.

Nicola Sturgeon has promised to bring in emergency legislation to introduce a rent freeze in Scotland, to help address the cost of living crisis.

Sturgeon told the Holyrood parliament that the Scottish Government will bring in emergency legislation to freeze rents for both the private and socially rented sectors.

“I can announce that we will shortly introduce emergency legislation to Parliament. The purpose of the emergency law will be two-fold.

“Firstly, it will aim to give people security about the roof over their head this winter through a moratorium on evictions.

“Secondly, the legislation will include measures to deliver a rent freeze.”

Sturgeon also said rail fares on ScotRail - which was brought into public ownership earlier this year - would be frozen until at least March 2023.

Five-year UK government bond yields have jumped too, to the highest since February 2010 according to Reuters:

These moves suggest the UK would need to pay a higher return to investors when it issues new debt to the market.

UK borrowing costs hit the highest since early 2014

Britain’s benchmark borrowing costs have hit their highest level in over eight years.

The yield, or interest rate, on 10-year gilts has jumped to 3.08%, a level last seen in early 2014.

Yields rise when bond prices fall, and – as this chart shows – there has been a rapid selloff of UK governments bonds in recent weeks, as Liz Truss outlined her plans for tax cuts.

The yield, or interest rate, on UK 10-year gilts
The yield, or interest rate, on UK 10-year gilts Photograph: Refinitiv

The selloff in gilts indicates that investors are demanding a higher rate of return for holding government debt, as they calculate the impact of the energy price freeze, and Truss’s pledge of tax cuts.

Other government bonds have also weakened this year, due to rising inflation expectations, pushing global bonds into a bear market on Friday (more than 20% off its peak).

US government bond yields are also rising this morning, but eurozone sovereign debt prices are more subdued.

Updated

An energy price freeze might also reduce the pressure on the Bank of England to raise interest rates sharply when it meets later this month.

Elizabeth Martins, senior economist at HSBC, says such a package would be a ‘near-term game changer’:

If she [Liz Truss] were to freeze the cap at current levels, it could even mean that inflation has already peaked.

That would potentially reduce inflation expectations and the likelihood of a wage-price spiral - the two key reasons why the BoE chose to get ‘forceful’ in August.

Martins adds, though a large fiscal injection might increase medium-term inflation, meaning interest rates might eventually have to rise higher.

But that is not necessarily a consideration for the Bank of England this month.

With a downturn looming, an energy price freeze might move us from a “more now, less later” world to a “less now, more later” one.

The BoE voted for its biggest rate rise in 27 years in August, from 1.25% to 1.75%. Economists had suggested it could plump for a 75bp rise at this month’s meeting, but Truss’s plans might change the thinking, as Martins explains….

Energy bill freeze would mean shallower recession and lower inflation peak, experts say

Liz Truss’s planned freeze on household energy bills means inflation will peak lower, and sooner, and could mean the UK recession is less severe, City experts say.

Capital Economics have called the package an “effective but expensive sticking plaster” to address the UK’s economic crisis.

Neil Shearing, Group Chief Economist, says it would mean inflation would peak next month, rather than surging again in January when the price cap was due to increase.

It could also mean the recession is only half as deep as feared.

If the new Truss government implements a freeze on domestic gas and electricity prices then inflation may peak at around 11% in October this year, rather than 14.5% in January next year as we currently forecast.

The economy is still likely to enter recession, but the peak-to-trough fall in real GDP may be more like 0.5% than our current forecast of 1.0%.

That fits with Torsten Bell of Resolution Foundation’s comments to MPs this morning, where he explained that the Bank of England’s grim forecasts of a long recession didn’t factor in a large package of new support.

And as flagged earlier, shares in UK retailers, pub chains and other consumer-facing companies are rallying in London today.

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown, explained.

Next and JD Sports were among the biggest risers in early trade with investors assessing that help will be on the way to ease the cost-of-living crisis which could put more money back in the pockets of their customers.

Farah Mourad, senior market analyst of XTB MENA, says financial markets welcome Truss’s move to avert a major energy crisis.

The stock market could extend its gains if the prime minister is able to deliver on her promises.

Lower energy bills could help improve industrial activity and free up more spending capacity which could boost retailers among others.

Steven Swinford from the Times has more details of the plan:

Updated

Liz Truss has been formally appointed as the UK’s prime minister, after being invited to form a new government by the Queen at Balmoral, following Boris Johnson’s resignation this morning.

Our Politics Live blog is covering all the action:

Some energy-intensive firms are facing untenable increases in their bills, says Dave Dalton, Chair of the UK’s Energy Intensive Users Group.

He has told MPs that companies are facing massive rises in bills as they roll off their contracts.

One member is coming off a contract at £40m per year, and being offered a new contract costing over £200m, possibly nearer to £300m, Dalton tells the BEIS committee.

He says the price increases are a ‘lottery’, and points out that some industries run uninterruptable processes.

Glass-making, for example, is critically dependent on a permanent gas supply.

If we were to reduce to less than 70% of a critical fuel load, the furnaces fail and close down, and there’s no way back.

The glass sector’s entire fuel bill for 2020 was around £212m, he adds – this year, it is projected to be over £1.3bn, for an industry whose entire value is less than £1.5bn.

Small businesses are holding off from signing up to massive increases in energy bills next month, hoping that the government will help.

That’s according to Tina McKenzie, UK Policy and Advocacy Chair at the Federation of Small Businesses.

She has told the BEIS committee hearing into the energy crisis that small firms are facing price rises of 300%-500%.

SMEs and the most vulnerable, she explains, as they aren’t covered by the retail price cap, and don’t have the same ability to renegotiate contracts as big firms.

McKenzie says that a lot of fixed contracts come to an end in October:

A lot of people are holding back, thinking that someone, somewhere in the government may have heard the cries for help and may actually do something before the renegotiation of contracts. But it’s pretty dire.

McKenzie adds there will be a ‘huge impact on unemployment’ if we don’t tackle the energy crisis, as some small firms have already closed their doors.

SMEs need a combination of measures, not just a wholesale gas price cap, to help them, she adds.

Some food and drink businesses 'may not make it through' winter

There could be shortages of food and drink items in supermarkets if UK food suppliers collapse because they can’t afford their energy bills.

Karen Betts, chief executive of the Food and Drink Federation, has told MPs there will be ‘consequences’, and a tightening of supply of certain products if SMEs in the food sector fail.

Betts tells the BEIS committee that it will be a really difficult winter, which underlines the need for a package of support for businesses on their energy bills.

Companies face exponential increase in their costs, such as ingredients, energy, raw materials, transport and labour, some of which are being passed on – leading to a ‘fairly rapid rise’ in food and drink inflation over the summer.

As we go through the winter, we will see how it goes. Different businesses will be impacted in different ways, and some businesses may not make it through.

Betts has heard from many firms who says it is impossible to fix energy bills at an affordable price now, so many are going onto daily rates, which makes business more volatile as it is harder to manage costs and prices

She tells MPs that some food producers are energy-intensive, such as flour millers, coffee roasters, and bakeries.

There is also concern about the resilience of the carbon dioxide market, Betts adds, and a ‘real tightness’ in the market.

Last month, one of the UK’s largest suppliers said it was temporarily halting production of CO2 due to soaring energy prices, and one of the UK’s biggest chicken producers has warned food security could be under threat after the carbon dioxide price quadrupled.

Hundreds of jobs are at risk after a roofing services company backed by NatWest Group collapsed into insolvency proceedings, Sky News reports.

Avonside Group, which is based in Manchester, is expected to formally appoint liquidators on Tuesday after attempts to find a rescue buyer failed.

It employs 450 people on a full-time basis, with a further 1,200 contract labourers on its books.

The crisis at Avonside highlights the mounting problems in the UK economy, with construction activity having shrunk last month (see earlier post).

Sky News explains:

People close to the process said parts of the group could yet be sold, salvaging an undisclosed number of jobs. NatWest is said to have lent £12m to the company.

Insiders said the taxpayer-backed lender had rejected a proposal from Core Capital, its private equity shareholder, to inject new funding into Avonside, leaving its directors with no choice but to appoint administrators.

NatWest is said to believe that it is likely to recover more of its loan through an insolvency process, although a person close to the bank insisted it was a “director-led process”.

Citizens Advice: cost of living crisis worsening

The energy crisis is already pushing families to crisis point, Dame Clare Moriarty, chief executive of Citizens Advice says.

Testifying to the BEIS committee, Dame Moriarty says Citizens Advice are hearing from people who have already lost access to gas and electricity, and are “a day away from running out of food”.

More people need foodbank vouchers, even after taking advice on how to maximise their budgets, she explains, and there is also a rise in threatened homelessness, and more issues related to domestic violence and mental health.

She cites one person who is so worried about the electricity bill from using his chairlift that he is considering living on just one floor in his house (but this isn’t easy, as the kitchen is on one floor, and the bathroom’s on the other).

Dame Moriarty warns that CA’s data shows the cost of living crisis is worsening.

We would normally expect to see a drop in demand in summer, we’re not seeing that.

We’re seeing record levels of people who can’t top up pre-payment meters, in what has been the joint-hottest summer ever recorded, so people aren’t using gas and electricity for heating.

Citizens Advice have heard from over 13,000 people this year who can’t top up their pre-payment meters, and are helping two people every minute with crisis support - such as foodbank vouchers and charitable donations.

Dame Moriarty says there was “a measurable drop” in the number of people needing foodbank vouchers the first cost-of-living payments were sent out in July. That drop lasted about three weeks, and demand is now back at record levels.

UK still risks recession despite energy bill support

Even a ‘very significant’ package of support on energy bills may not be enough to avoid a UK recession, MPs have heard, but it would cushion the impact of the downturn.

Torsten Bell, chief executive of Resolution Foundation, has told the BEIS committee that the downturn could be less steep, if the government supports household incomes and businesses.

Bell says the Bank of England was ‘broadly right’ to paint a grim picture of the UK economic outlook in early August, when it predicted the economy would fall into recession by the end of 2022, and shrink through 2023.

The economic news since has been generally bad, he points out, including the inflation outlook (Goldman Sachs, for example, warned inflation could hit 22% early next year if gas prices didn’t fall).

But, those forecasts don’t take into account the “very significant” package of support now expected in the coming days, which Bell says could support household incomes.

A package of measures that provides very significant support could see us move from a situation where household incomes are falling very significantly this year, [by] 5%, to one where there’s almost no fall.

The support on offer to business is also important, Bell adds (which is why Truss’s team are reportedly planning help to cut their bills).

The way we ration energy usage is by people stoppping activity in the business sector, and that’s one of the reasons you get a recession.

Q: So, can we avoid a recession if the energy package is big enough?

Bell suggests this is unlikely.

I think you’d be optimistic to be very confident you can avoid a recession, given what’s happening to Europe.

Bell says it will be hard to avoid a recession in Europe, given the scale of the energy price rises. But there is high uncertainty over the duration and the depth of the downturn, given the volatility in energy prices.

BBC: Truss to freeze energy bills for 18 months

The BBC are reporting that Liz Truss is planning to freeze household energy bills at the current level for this winter and next, paid for by government-backed loans to energy suppliers.

During a news bulletin citing its business editor, the BBC said:

“Energy companies would take out government guaranteed loans to bridge the gap between the wholesale price in the market and the fixed price they are charging customers.

Those loans would be repaid over the next 10 to 20 years through supplements to customer bills.”

The scheme could cost between £100bn and £130bn, it added.

Over in Germany, factory orders have fallen for the sixth month running as soaring energy prices and economic uncertainty hit demand.

Orders fell 1.1% in July, driven by a slump in consumer goods.

Domestic orders fell 4.5%, while demand from other eurozone countries tumbled by 6.4%, wiping out a 6.5% jump in orders from beyond the euroarea.

The shrinking order books add to current recession fears, warns Carsten Brzeski of ING:

“With surging energy prices and fading new orders, the outlook for the German industry is anything but rosy.”

Gas prices are easing back today, after jumping on Monday after Russia left its Nord Stream 1 pipeline closed.

The day-ahead and month-ahead UK wholesale gas prices have dipped around 10%, as have benchmark European wholesale gas contracts.

But prices are still several times higher than a year ago:

Updated

The FTSE 100 index of blue-chip shares is marginally higher this morning, up 0.15%, helped by a modest bounce in retailers, pub chains, and other consumer-facing companies (see earlier post).

Victoria Scholar, head of investment at Interactive Investor, tells us:

Incoming Prime Minister Liz Truss has signalled her willingness to cut taxes and spend billions to combat the energy crisis, despite the inflationary side-effects of such expansional fiscal policies.

With the energy crisis at the top of the political agenda for the new PM, shares in Centrica are rallying on the expectation that the government could deliver some kind of support to offset the underlying wholesale market volatility.

Retailers like Next, Kingfisher and JD Sports are trading near the top of the FTSE 100 amid hopes that Truss’ fiscal measures will ease the cost-of-living crisis, reducing the squeeze on households and free up some income for additional consumption elsewhere such as in the shops, in pubs and for online retail.

The FT reported last night that Centrica, which owns British Gas, is talking to its banks about securiting billions of pounds in extra credit to meet ballooning collateral demands, caused by the extreme volatility in energy markets.

Updated

UK building sector contracts for second month running

Construction workers shelter in the shade at building site in London in August.
Construction workers shelter in the shade at building site in London in August. Photograph: Andy Rain/EPA

Britain’s construction sector has shrunk for the second month running, highlighting the economic challenges facing Liz Truss and her team.

Activity at building firms fell in August, following a downturn in July, according to a closely-watched survey of purchasing managers by S&P Global.

Builders reported that growth in new orders ‘slowed to a crawl’, as customers were put off by cost pressures and fears of an economic downturn, which also hit business confidence across the sector.

Civil engineering and commercial activity both shrank, but there was a fractional increase in homebuilding projects.

Andrew Harker, economics director at S&P Global Market Intelligence, warns that the UK construction sector faces a challenging period, and could pause hiring soon.

“Activity weakness was broad-based in August, with none of the three monitored categories immune to the wider slowdown. Commercial activity dropped into contraction for the first time in just over a year-and-a-half, and while housing activity ticked higher, the segment has been in broad stagnation over the past three months.

“Price and supply pressures showed further signs of easing as waning demand throughout the sector lifted pressure on suppliers. Meanwhile, the main positive from the latest survey was a solid increase in employment. That said, hiring at least in part reflects an ongoing catch-up following the pandemic.

If activity continues to fall, firms will likely soon feel that their staffing capacity is sufficient and pause hiring.”

Updated

Bloomberg: Truss plans £40bn energy-aid package for UK businesses

Bloomberg are reporting that Liz Truss is finalizing plans for a £40bn support package for businesses, to lower their energy bills.

The plan would help firms cope with the soaring energy costs, which are making it unviable for some factories, pubs and shops to keep running as prices rise and winter approaches.

Bloomberg’s Alex Wickham says the incoming prime minister has two options to lower businesses’ energy prices – either fix the wholesale price, or set a guaranteed reduction.

Truss is considering two options, either setting a guaranteed unit price that businesses will pay, or a percentage or unit price reduction that all energy suppliers must offer firms, according to documents seen by Bloomberg. The government would agree to reimburse energy suppliers for their losses and the price of energy charged to businesses would be reviewed quarterly.

The policy will be announced this month, and the aim is to implement in October when many companies’ energy contracts are ending, according to the people. Officials are in the process of drafting emergency legislation.

If the program for businesses lasted for six months, it would cost about £40bn, the government estimates [although this would depend on the wholesale gas market, which is clearly hard to predict!]

Updated

Shares in UK retailers, food groups and pubs rise

UK companies are rallying on the London stock market this morning, amid hopes that Liz Truss’s administration will provide some desperately-needed help to households this winter.

DIY group Kingfisher (+5.9%), and retail chain Next (+5.3%) are the top risers on the FTSE 100, with hotel chain Whitbread (+4%) and sportswear group JD Sports (+3.8%) close behind.

They would all benefit if shoppers weren’t quite so squeezed by soaring energy costs.

Pub chains Mitchells & Butler (whose chains include All Bar One and Harvester) and JD Wetherspoon have both jumped 6% on the smaller FTSE 250 index, along with bakery chain Greggs, and pizza chain Domino’s.

UPDATE: These companies, particularly the pub chains, should benefit from the business support package being considered by Liz Truss.

Updated

Clarke: 'major intervention' on energy bills

Chief Secretary to the Treasury Simon Clarke has indicated that Liz Truss’s plan to tackle soaring energy prices will be a “major intervention” to help businesses as well as households.

He told BBC Radio 4’s Today programme:

“It will come very shortly and there is a clear commitment to rise to the level of events and to provide early certainty to families and businesses that there will be help available to meet the undoubted challenges that this autumn and winter are going to bring.

“So it will be a major moment I think in terms of drawing a line under the sense of uncertainty which undoubtedly is present in the country at this time.”

But Clarke, who has been tipped to become Levelling Up, Housing and Communities secretary of state, wouldn’t fill in the key details on the plan, saying:

“It will be a major intervention and it will be something which is fair, fundamentally fair in terms of how it’s structured to look after, as I say, both the current situation, but also the long-term interest to bill-payers.”

Although sterling is recovering from its lowest level in almost 30 months, it could suffer further weakness if Liz Truss’s government makes policy mistakes that deepen the UK’s economic problems, warns Neil Wilson of Markets.com.

Wilson says Truss’s ‘mooted fiscal largesse’ (tax cuts) could pose inflation risks, with the consumer prices index already soaring over 10% in July.

And on ‘Trussonomic’s, he says:

And what are we talking about here? It’s kind of trickle-down, watered-down Reaganomics (the state is today is huge and she doesn’t have the freedom to cut it back like he did) – lower taxes designed to boost business investment and consumer spending.

She talked about a “bold plan to cut taxes”, which might not help the inflation fight much if it’s not terribly targeted.

Plans to look again at the Bank of England’s mandate have clearly unsettled some and left the pound with another headwind. Uncertainty over the NI Protocol being another, sterling has clearly got lots weighing it down and making it particularly unloved.

We’re waiting to hear the key details of Liz Truss’s plan to freeze energy bills… including how long it will last, how much it will cost, and how it’ll be paid for, as commentator Sam Freedman explained last night:

Businesses urge Liz Truss to act fast over soaring bills

Businesses have been urging Liz Truss to take immediate action on the energy crisis, warning they face astronomical incrases in their bills.

Guy Adams, who has run the Isle of Barra Beach Hotel in the Hebrides for 16 years, may be forced to close his doors to guests for at least a year as spiralling energy bills make business untenable.

The hotelier’s annual electricity bill is projected to rise from about £25,000 to £120,000 on top of a wave of price increases expected from suppliers, who are also facing soaring costs.

He says the boutique hotel, which lays claim to be Britain’s most westerly, would have to double the prices it charges it guests next year – to a level Adams believes cash-strapped holidaymakers will not pay – unless Liz Truss turns her “pro-business” promises into rapid action.

“We can’t quote anyone looking to book their holidays next summer because we can’t give them a rate,” he says.

“But we are looking like we would have to more than double our rates. If we do that we would not expect anyone to be able to pay that, given everyone’s costs have gone up. We would have paper rates and no business.

“We must now look at not opening next year – shut down for at least a year. We have no option but to put it on the table given the huge overnight increase in energy costs. It will be cheaper to not open than open.”

Here’s the full story, by my colleagues Mark Sweney and Alex Lawson:

The beleaguered pound has received “a much-needed boost” from reports that incoming Prime Minister Liz Truss had drafted plans to avert an energy crisis, reports Bloomberg.

But it also warns that “the jury’s out on how long it’ll last”, given sterling’s weakness, and risks of a UK recession.

The currency has fallen for three straight months but analysts surveyed by Bloomberg expect it to climb to $1.19 by March 2023.

“Sterling is rising on the argument that the UK economy might not now take such a big hit from energy prices,” said Ray Attrill, head of FX strategy at National Australia Bank Ltd. in Sydney.

“The size of potential fiscal support might mean the Bank of England will be emboldened to go even harder to restrain demand to quell underlying inflation pressure.”

Pound rises from pandemic lows on Truss's plan to freeze energy bills

Tackling the UK’s energy crisis must be high on Liz Truss’s list, and there are a flurry of reports that the next PM will take rapid steps to freeze bills.

This has lifted the pound back by almost a cent this morning, to $1.16, reversing Monday’s selloff which sent sterling to its lowest since March 2020.

Truss is expected to unveil an emergency package to tackle the cost of living crisis, to include freezing energy bills for homes and businesses until January next year at least - and possibly until 2024, according to some reports.

Truss allies have been locked in talks with energy bosses, thrashing out details of the price freeze.

One option on the table is that energy suppliers will be able to take out government-backed loans to subsidise bills, with the cost then repaid over years to come.

The Times reports that Truss is expected to freeze energy bills for every household and business in the country, before the price cap rises by 80% in October.

Truss, who will be appointed by the Queen today, is ready to cap the cost of gas used for electricity and heating. This would effectively commit the taxpayer to paying Britain’s energy bills beyond a certain level to stop widespread hardship and bankruptcies.

More here: Truss plans energy bill freeze amid fear of mass bankruptcies

The Daily Telegraph is reporting that among the measures under consideration was a scheme - costing tens of billions of pounds - to freeze bills until the next general election in 2024.

The Telegraph understands that, among the moves to tackle the cost of living crisis set to be unveiled this week, Ms Truss could freeze energy bills for all households until 2024.

The “huge” policy intervention would last longer and cost tens of billions of pounds more than the Labour Party’s proposal to cap prices at their current levels until early 2023.

More here: Liz Truss considering plans to freeze energy bills until next election

On Monday, as Europe’s gas crisis intensified, the pound fell within a whisker of its lowest level since 1985. Sterling dropped to a new post-pandemic low of $1.444, as the US dollar continued to strengthen.

Updated

Investors are also concerned that Liz Truss’s administration could undermine the Bank of England’s independence by changing its mandate to fight inflation.

During the campaign, ally Suella Braverman said Truss would look whether the BoE’s current arrangements are ‘fit for purpose’

David Riley, Chief Investment Strategist at BlueBay Asset Management, says an attack on the Bank of England would worry international investors:

Like many other central banks, the Bank of England has been guilty of being too late to respond to the inflation threat. But anything that smacks of reducing the independence of the Old Lady of Threadneedle Street would worry international investors that are funding the UK’s big twin budget and trade deficits at time when inflation is the highest amongst the G7 economies.

Hard choices rather than wishful thinking are required to boost long-term growth potential of the British economy and maintain confidence in the monetary and fiscal policy framework. The credibility of the new Prime Minister’s economic policy programme will be judged in the bond and foreign exchange markets.

Introduction: UK facing ‘serious questions on fiscal credibility’ and risk of sterling crisis

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

Liz Truss takes over a country on the brink of recession, with economists warning of the risk of a 70s- style sterling crisis if the UK loses the confidence of the international markets.

The UK’s next prime minister faces one of the most challenging fiscal outlooks of any new prime minister in recent memory, once she’s been appointed at Balmoral today.

One of her first tasks will be to announce a major support package for UK households to tackle the energy crisis.

But given her leanings towards tax cuts, Truss must tred carefully to avoid spooking the markest, risking a balance of payments crisis.

Deutsche Bank FX Strategist Shreyas Gopal has warned that the risks of a “sterling crisis” should not be underestimated, telling clients that:

The risk premium on UK gilts [government debt] is already rising, coincident with unusually large foreign outflows. If investor confidence erodes further, this dynamic could become a self-fulfilling balance of payments crisis whereby foreigners would refuse to fund the U.K. external deficit.

“A balance of payments funding crisis may sound extreme, but it is not unprecedented: a combination of aggressive fiscal spending, severe energy shock, and a slide in sterling ultimately resulted in the U.K. having recourse to an IMF loan in the mid 1970s.

Here’s the full story:

Geoff Yu, FX and Macro Strategist at BNY Mellon, says there will be“devastating socio-economic consequences” if the government doesn’t act to prevent energy bills rising from “barely 3% of median household disposable income to closer to 20%”.

All European governments are expected to announce their own meaures – and windfall taxes will need to be part of the solution, Yu says.

But as Truss has prioritising tax cuts to kickstart growth throughout her leadership campaign, it will be hard for her not to deliver revenue-based easing.

He writes:

This sets the UK up for some serious questions on fiscal credibility – it is already being tested in bond markets.

We share concerns regarding the right balance of fiscal plans in the UK and expect some degree of fiscal risk premia to feature in the near term. However, we think fears of unfunded tax cuts and energy subsidies precipitating a fiscal collapse are not justified.

Yu adds that the markets are questioning Truss’s argument that productivity improvements will pay for tax cuts – as she must face a general election in two years.

A closely-watched survey of UK purchasing managers yesterday showed that the UK private sector shrank in August, suggesting a rising recession risk.

The energy crisis is also forcing Britons to cut back on spending.

The British Retail Consortium (BRC) has reported this morning that sales volumes tumbled last month, with retailers relying on price rises to lift their sales.

Helen Dickinson OBE, Chief Executive at the British Retail Consortium, reports that parents cut back on spending for the new school year, as household budgets tightened.

“Retail sales growth slowed in August compared to the previous month as consumers reined in spending amidst the spiralling cost-of-living. While inflation in retail prices is lower than general inflation at over 10%, this still represents a significant drop in sales volumes.

For the first time in recent months, clothing sales were sluggish as summer events ended, and parents held back on back-to-school spending. White goods and homeware remained hardest hit, but products such as air fryers and knitwear did get a boost as thrifty consumers prepare for soaring energy bills.”

The agenda

  • 7am BST: German factory orders for July

  • 8.30am BST: Eurozone construction PMI report

  • 9.30am BST: UK construction PMI report

  • 10.30am BST: Business, Energy and Industrial Strategy (BEIS) committe hearing on the cost of living crisis

  • 3pm BST: US ISM services PMI

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