Interest rate warning as energy bill freeze may not stop future rate hikes | Personal Finance | Finance


The new Prime Minister Liz Truss is expected to freeze energy bills, in a measure designed to help millions in the current crisis. The speculated plan would effectively keep the price cap at the current rate of £1,971, in what some hope will keep fears of the impending winter at bay.

However, it may not be as good news for interest rates, as a freeze may force the central bank to raise its interest rates again.

The matter was raised by MPs in the House of Commons Treasury select committee, who questioned the implications of an energy bill freeze.

Huw Pill, Chief Economist of the Bank of England, said: “In response to the question, will fiscal policies generate inflation?

“We are here to ensure they don’t generate inflation.

READ MORE: Martin Lewis suggests what in-credit Scottish Power customers can do

In December 2021, the base rate rose from its historic low of 0.1 percent back to 0.25, and it was then raised again to 0.5 percent in January 2022.

In March 2022, the central bank raised interest rates again to 0.75 percent, and this was followed by two subsequent rises in May and June 2022.

In August 2022, the Bank of England’s decision to raise the base rate by 0.5 percent caught attention as the biggest hike in 27 years.

The exact details of Ms Truss’ policy plans on energy bills are yet to be released.

However, it has been estimated her plans could cost as much as £130billion over the next 18 months.

It will be difficult to pin down a figure to due fluctuating prices of natural gas, which many hope will decrease in the coming months.

What is more likely, however, is a recession for the UK, in what is likely to create further misery for Britons.

The fiscal event was predicted by the central bank last month in its continuing grapple with prices. 

Andrew Bailey, Governor of the Bank of England, said any recession would “overwhelmingly be caused by the actions of Russia and the impact of energy prices”. 

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