Details of upcoming fiscal support in response to surging energy prices look unlikely to be reflected in the BOE's September monetary policy debate
Details of the UK government's GBP100-billion-plus fiscal package aiming to partially offset the looming spike in energy bills look certain to come too late for the Bank of England to be able to fully factor them into considerations during its September rates-setting meeting.
The Monetary Policy Committee is scheduled to release minutes accompanying its policy decision at 1200 GMT on Sept 22, while the so-called “fiscal event” to announce the package looks likely to take place the following day, when parliament could be sitting, despite it being past the current recess date. While the MPC is likely to be briefed by the Treasury on the package none of the detail could be included in the minutes, as that would risk revealing market-sensitive government policy before it was announced to parliament.
Analysts are split over whether the MPC will hike by 50 or 75 basis points at the meeting, but the still-to-be-public details of the fiscal package look very unlikely to swing votes. (See MNI STATE OF PLAY: BOE Hikes 50bps, Stresses Uncertain Outlook)
Some details of the government measures will still not even have been finalised by next week and may not be revealed until November, according to reports citing officials. This would further weigh against basing any policy fine tuning on the package, rather than using it as a guide on the general direction of fiscal support.
The government has already announced its intention to limit annual energy prices for the typical household to GBP2,500 from October 2022 for two years, just over GBP1,000 less than the BOE assumed in its August forecast round, which could knock an estimated four to five percentage points off forecast near-term headline inflation. But as BOE Chief Economist Huw Pill told the Treasury Select Committee on Sept 7, the MPC will focus on the implications for inflation at the “monetary policy-relevant horizon," from 18 months onward, and will also want to know how the government will remove the energy price cap.
There is deep uncertainty about how exactly any price cap will work for businesses, with analysts, including those at Resolution Foundation, pointing out that the majority of medium-sized and larger firms have fixed gas and electricity contracts through to at least Spring 2023 while smaller ones may well be on household-style variable tariffs, making the design of the business package very tricky.
The UK as a net gas importer has been heavily exposed to the steep rise in prices, and introducing a price cap does not alter the fact that the country will still have to bear its cost, whether through the public sector balance sheet or otherwise, Pill noted.
Current wholesale gas futures would imply that support for households alone over the next six months could cost about GBP57 billion, and about GBP120 billion over two years, according to the Resolution Foundation. Business support could add tens of billions to this, the Foundation says, but a fall in gas prices could also mean the total cost is considerably less.