In the scenario both he and Tombs outlined, where consumer discretionary spending rises as a result of the energy subsidy, Zangana says this “could lead to core inflation being higher as demand picks up”.
He says that in such a scenario the BoE “should become more hawkish, but they may ease off on rate rises a little in the very short term, but then put them up by more in the future”.
He feels this is because the result of the energy price subsidy could be inflation moves from the supply side, where it is usually viewed as temporary, to the demand side, where it can become more entrenched.
Dall’Angelo says: “Implications for monetary policy are not straightforward, but on balance the BoE will likely tighten its monetary policy more aggressively in the short term in response to additional fiscal easing.
"Indeed, a short-term boost to demand will likely result in higher inflation in the medium term, which is the relevant horizon for monetary policy. That said, a lower and earlier peak in headline inflation should help stabilise inflation expectations and limit the risks of elevated inflation becoming entrenched.
"At its monetary policy meeting next week, we expect the BoE will likely employ a large rate hike of either 0.5 per cent or 0.75 per cent. While the decision appears to be finely balanced, [the government’s energy price] announcement has increased the odds of a 0.75 per cent move.”
Emma Mogford, who runs the Premier Miton Monthly Income fund, says: “In the near term the household energy freeze should boost consumer spending, particularly because it gives people visibility for the next two years. As the energy freeze lowers inflation, interest rates may not rise as much, which will also keep household and business debt at more affordable levels.
"That’s good news for UK companies which have seen their share price fall this year. However, government borrowing is no longer free and the significant additional debt will squeeze government finances in the years to come. That could ultimately lead to higher government borrowing costs in the future and less money available for other parts of the economy.
"What is clear is that state involvement in markets is rising and that will have significant consequences for investing."
Zangana says the market’s expectations for how UK interest rates can rise has moved sharply upwards in recent months, with the peak now expected to be north of 4 per cent, having been less than 3 per cent.
