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Liz Truss announces energy cost cap for the next two years

Expectations of reducing inflation emerge following the energy cost cap announcements by new Prime Minister Liz Truss.

08 September 2022

Newly appointed Prime Minister Liz Truss has performed her first ideological reversal two days into office. As little as a few months ago, Truss was against imposing price caps on energy, preferring to keep to her free-market beliefs. However, the deteriorating cost of living crisis means goal posts need upending – today’s announcement will see energy costs capped at GBP 2500 per year for the average consumer household for the next two years, in addition to providing support for businesses struggling with energy bills for the next six months. While we are still uncertain as to how the cap will be funded (ultimately it will be the taxpayer) as well as how much it will cost, with the latter an open ended question dependent on wholesale energy costs, this announcement will put an immediate cap on inflation expectations in the UK, with the government expecting it to reduce inflation by 4-5%.

The chief economist at the Bank of England, Huw Pill has already recently stated that rate hikes will likely still need to happen irrespective of any government schemes to cap energy prices as broader inflation threats still remain should Truss push further into tax cutting territory in the future. Short dated market pricing in gilts suggest that this is still the view the market holds, with one year forward rates next year still priced just over 4% – that’s more than 2% higher than where we sit currently.

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Charles Hepworth

Investment Director
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