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Bank of England says Truss plan could slow inflation, too early to talk about rates

David Milliken and Andy Bruce

LONDON (Reuters) – Britain soars if new Prime Minister Liz Truss helps households and businesses deal with soaring energy costs Inflation is likely to moderate, but it’s too early to tell what that means for interest rates, the Bank of England’s chief economist said. Although it expects a recession to begin later this year, inflation will exceed %.

The Bank of England forecast inflation to exceed 13% in August, and some economists have said that if Natural gas prices – rising due to Russia’s invasion of Ukraine – remain high and could hit 20%.

But that could change if Truss continues to report plans to cap energy home energy bills and support businesses, Bank of England chief economist Huw Pill told lawmakers on Wednesday.

While subsidies to households may increase in order to demand and create more inflationary pressures, “netting the effect on headline inflation in the short term, I would expect a decline,” Pill said .

Truss moved into Downing Street on Tuesday, pledging to help Britain weather a gas price shock. She will announce details of her plans on Thursday.

Pill said the impact on monetary policy remained unclear, but added that the Bank of England would ensure government spending does not trigger inflation.

Economists have said energy price caps could mean inflation has peaked, but in the long run this could increase if future bills are taxed to compensate the energy giants price pressure.

Bond market turmoil

Bank of England Governor Andrew Bailey, also speaking to the Parliamentary Finance Committee, said that Truss’s forthcoming statement would be a good idea for the market Provides useful clarity.

UK government bond prices boosted by concerns over the size of borrowing needed to fund Truss’ cost-of-living support package and her promised tax cuts UK government bond yields rose to their highest level since 2011.

“It’s important to have a clear policy direction going forward…it’s important for the market to understand what’s going to happen.”

Deutsche Bank (ETR: DBKGn ) Truss’ planned energy price support and tax cuts could cost 179 £1 billion ($2023, it said on Wednesday billion), about half of the UK’s historic pandemic spending push.

New Finance Minister Kwassi Kwaten tells bankers and investors that borrowing will increase in the short term, but he will ensure fiscal discipline

Bailey said, Wednesday’s comments by BoE officials should not be interpreted as a signal of what the central bank will do next week. Investors scaled back bets 179 on a significant increase in basis points in September 20 to around 20%.

Investors expect the Bank of England to raise rates to at least 4 in the middle of 25 25%, higher than 1.20%, although most economists say , they think it will peak at lower levels given the possibility of a recession starting later this year.

The last time the central bank raised rates by at least 179 basis points was at 1989, excluding an attempt to prop up the pound in 2011, which was reversed in less than a day.

Bailey’s rejection of the Bank of England’s suggestion to raise interest rates excessively adds to the headwinds facing Britain. .

Bailey was asked about another promise from Truss: a review of mandates

He said the move to money supply targeting is not Sensible, there will be no appreciable improvement in the nominal GDP target.

($1=0.8750 pound)

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