The government is to introduce a new law to cap the cost of payday loans.
The level of the cap, which has not yet been announced, will be decided by the new regulator, the Financial Conduct Authority (FCA).
The Treasury says there is "growing evidence" in support of the move, including the effects of a cap already in place in Australia.
The cap will be included in the Banking Reform Bill, which is already going through Parliament.
Some payday lenders have been criticised for charging more than 5,000% annual interest - though the lenders say these loans are meant to be short-term so the annual rate can make charges appear worse than they are.
'Duty on regulator'Australia has an interest rate limit of 4% per month, after a maximum up-front fee of 20%.
The FCA has already been given the power to cap the costs of payday loans.
But BBC political correspondent Vicki Young said Chancellor George Osborne had now gone further by "placing a duty on the regulator to use those powers".
Labour leader Ed Miliband has already said his party would cap the cost of payday loans.
Mr Miliband has also pledged to give councils new powers to limit the spread of payday lending shops in town centres.
The shadow minister for competition and consumer affairs, Stella Creasy, told BBC Radio 4's Today programme "the devil really is in the detail".
"The government is now talking about capping the costs of credit...the question is whether they mean capping just the charges or the total cost of credit.
"This industry's a bit like an inflated balloon and if you don't crack down on the whole cost of credit then wherever they can recoup their costs by expanding the prices at other points they will."
Earlier this month, Mr Miliband said payday lenders should not be allowed to "target" children by showing adverts on children's TV.
Last month the FCA told payday lenders tougher regulation would soon be implemented.
It said all borrowers should have an "affordability" check before being given a loan and suggested risk warnings should be put on adverts.
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