4th February 2022
Bite-sized business news from the UK and beyond
Good morning The last 24 hours have seen quite a raft of UK business and finance news, let’s jump right in!
£350 income support as price cap rises £693
Back-to-back interest rate hikes for the first time since 2004
ECONOMY£350 income support as price cap rises £693
What’s going on?Yesterday Ofgem, the energy regulator, confirmed that the price cap on energy bills for households would rise by £693 from April to £1,971 a year a 54% increase. On the same day the chancellor announced that millions of households would receive loans and rebates worth £350 to help with bills.
Why is this important?
In 2021 alone wholesale gas prices rose fivefold driven by a mix of a post-lockdown boom in demand along with supply issues and geopolitical unrest in Eastern Europe, a major supplier of gas.Ofgem sets a price cap twice a year based on wholesale prices, it was originally designed to protect households from suppliers passing on cost increases to their bills. But for the past few months the price cap has been below the cost of actual energy prices meaning many providers couldn't make money and 29 went bust.The announcement yesterday of a record high price cap of £1,971 will be good news to providers as they can now charge more but bad news for millions of Brits already facing pressure from rising costs elsewhere in their budgets. Within the hour the government announced plans to help households:
£150 discount in council tax for homes in bands A to D, covering 80% of households from April 2022.
£200 loan to pay for energy bills, for all households, from October 2022 repayable over five years starting April 2023.
But many have criticised the fact that households will still have to bare the brunt of the bill rises and will be forced to pay back £200/£350 of the support.
The price cap increase is expected to push 2m households into fuel poverty – defined as spending 10% of their income on energy bills – taking the total to 6m.Even with the £350 from the government, rising inflation and interest rates (see below), National Insurance increases and low wage growth means that millions will feel the strain on their budgets this year creating a "cost of living crisis".
ECONOMYBack-to-back interest rate hikes for the first time since 2004
Last December the Bank of England nudged up interest rates from historic lows of 0.1% to 0.25%. Yesterday, at its first meeting of 2022 the Bank decided to up rates to 0.5% - the first time it’s done consecutive increases in 18 years. The increase was expected as UK inflation has been running at 5.4% - the highest rate since 1992. The Bank predicts that prices will keep rising for the next few months, peaking at 7.25% by April and averaging at 6% for the year – well above the 2% target rate. It hopes that raising borrowing costs will be enough to cool the demand for goods and hence their pricesAlongside the rate news the Bank delivered a gloomy outlook for household finances this year. It cautioned that inflation and higher borrowing costs would see disposable income fall by 2% this year, the most since records began in 1990.An environment of rising interest rates is typically reserved for putting the brakes on economies that are growing quickly. This isn’t exactly the case for the UK right now as it emerges out of Covid related restrictions, the Bank cut the forecast for economic growth from 5% to 3.75%. But the Bank believes that without the rate hikes inflation will spiral out of control which could have even more damaging impacts for households and businesses.
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