Energy crisis: IMF orders Europe to stop intervening in voters’ household bills

Martin Lewis fumes at the 77% price cap increase on bills

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Governments should allow the retail price of energy to rise in order to promote saving energy while protecting poorer households, the International Monetary Fund (IMF) has advised. In a blog post, the international, financial institution said existing policies which aim to protect consumers from soaring costs will weaken European economies and slow the switch away from fossil fuels.

The European arm of the IMF said in its blog post: “Governments cannot prevent the loss in real national income arising from the terms-of-trade shock.

“They should allow the full increase in fuels costs to pass to end-users to encourage energy saving and switching out of fossil fuels.

“Policy should shift from broad-based support such as price controls to targeted relief such as transfers to lower-income households who suffer the most from higher energy bills.”

The authors of the post estimate the average household in Europe will see a roughly seven percent cost-of-living rise relative to expectations early last year.

They acknowledge higher energy prices will impose a “heavier burden” on poorer households, which spend a larger share of their income on gas and electricity.

Relief measures to support the poorest in countries including the UK and Estonia are identified as a “priority” by the blog post authors.

They said: “So far, Europe’s policymakers have responded to the energy cost surge mostly with broad-based, price-suppressing measures, including subsidies, tax cuts and price controls.

“But suppressing the pass-through to retail prices simply delays the needed adjustment to the energy shock by reducing incentives for households and businesses to conserve energy and enhance efficiency. It keeps global energy demand and prices higher than they would otherwise be.

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“Moreover, the increasing cost of these measures is squeezing economies’ limited fiscal space as high prices persist. In many countries the cost will exceed 1.5 percent of economic output this year, mostly on account of broad price-suppressing measures.”

The IMF blog, published on Wednesday, added the case for supporting businesses affected by soaring energy costs “is generally weak”, arguing such schemes would in part blunt incentives for energy conservation.

Meanwhile, the Bank of England warned today the UK is set to fall into its longest recession since the financial crisis and inflation will peak at 13 percent in the wake of soaring gas prices.

The Bank’s forecasters expect CPI inflation to hit 13.3 percent in October if regulator Ofgem raises the price cap on energy bills to around £3,450.

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Decision-makers at the Bank hiked the base rate 50 percentage points from 1.25 percent to 1.75 percent in a bid to restrain runaway inflation.

Household incomes are expected to drop for two years running for the first time since the 1960s. This year they will fall by 1.5 percent and 2.25 percent in 2023.

Gas prices shot up by almost a third in the last week of July to reach the highest average cost since mid-March, according to new data.

The Office for National Statistics (ONS) revealed today that the National Grid saw the average price for gas increase by 31 percent to 9.8p per kilowatt hour over the week to July 31.

Fuel spending jumped nine percent in the week to July 31 compared to the previous week, the ONS’s report found.

This also represented a 54 percent increase on the previous year and more than double the average amount spent in February 2020 before the Covid pandemic struck.

The UK Government has introduced an Energy Bills Support Scheme covering England, Scotland and Wales which will see about 29 million eligible households receive £400 from October.

However, campaign group National Energy Action (NEA) is calling for a targeted approach, including a separate tariff for people on lower incomes.

It is also calling on Ofgem to reduce the standing charge for prepayment users.

Ofgem announced today it will review a price cap on domestic energy prices quarterly rather than twice a year.

This means consumer bills could be increased more frequently if wholesale prices continue to rise.

Ofgem CEO Jonathan Brearley told the BBC: “I know the changes we are bringing in do not feel fair to anybody, but those are ultimately driven by the changes we are seeing globally in gas prices and that’s not a British problem, that’s a global problem.”

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