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Hopes rise for rate cuts as energy price cap falls by £238

Governor of the Bank of England Andrew Bailey
Reduced spending on household energy could help bring down inflation and open the door to rate cuts from Andrew Bailey’s MPC - Frank Augstein/Pool via REUTERS

A steep cut in the energy price cap will help to crush inflation and open the way for the Bank of England to cut interest rates, economists have predicted.

Industry regulator Ofgem is cutting the price cap by £238 from April, meaning households will pay an annual average of £1,690.

The drop of 12pc takes bills to their lowest level in two years, following the supply chaos which followed Russia’s invasion of Ukraine.

Imports of gas from America as well as a relatively mild winter in Europe have helped boost stocks of fuel, bringing down prices.

As a result economists expect inflation to fall to, or even below, the Bank of England’s 2pc target for the first time since July 2021.

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This should allow the Bank’s Monetary Policy Committee, led by Andrew Bailey, the Governor, to cut interest rates from their current level of 5.25pc, according to James Smith, economist at ING.

Falling energy costs “should be sufficient to take headline inflation below target in April to 1.9pc, and we think it could go as low as 1.4pc in June,” he said.

“We think consumer price inflation is more likely to stay below target for the vast majority, if not all of this year, especially if we get another drop in energy bills during July.”

So far Mr Bailey and his colleagues have been cautious on rate cuts as they fear strong pay growth and stubborn prices in the services sector are signs inflation has not yet been defeated by their high interest rates.

But Mr Smith believes that time is almost over.

“Even with headline inflation set to fall below target in April, the Bank of England will continue to tread carefully as we go into the second quarter. We expect an August rate cut,” he said.

The MPC cut interest rates to a record low of 0.1pc in the pandemic, and began raising borrowing costs again in December 2021 once it was clear that living costs were on the up. Inflation peaked at 11.1pc in October 2022, and has since fallen back to 4pc – still twice the target level.

There could be even more good news to come on household bills.

Emily Fry, economist at the Resolution Foundation, predicts further falls in energy prices will bring the cap down by one-quarter over the course of the year – equivalent to almost £550 for the typical household.

“The energy price cap is set for the biggest percentage fall in April since its introduction in 2019. And with the cap set to remain around £1,500 for the rest of the year, households can look forward to their annual energy bills falling by around a quarter this year, which will ease the pressure on family budgets,” she said.

“But while energy bills are falling year-on-year, they remain significantly higher than they were before the cost of living crisis. This is especially true for families living in poorly insulated homes, who are having to pay over a third more for gas and electricity compared to living in a well-insulated property.”

The cap governs the amount suppliers can charge customers per unit of energy used, so Ofgem’s headline figure shows how much a typical household can expect to pay, rather than representing an overall limit on how high any one person’s bill can rise.