November 26th budget may well lead Bank of England to cut rates below 3.5%
Sterling remains under pressure today, at 88p against the euro, close to its weakest level since early 2023. The catalyst was yesterday’s Bank of England decision to keep rates on hold at 4%, but with Governor Andrew Bailey’s press conference seen as endorsing the market curve for two further 25bp rate cuts to 3.5% in 2026, most likely starting at the December 18th policy meeting. Crucially, however, the Bank of England’s GDP and CPI inflation projections do not make any adjustment for the negative impact of the likely £30-£40bn (1%-1.3% of nominal GDP) package of tax rises and spending cuts expected in the November 26th budget.
Chancellor of the Exchequer Rachel Reeve’s speech on Tuesday (November 4th) explicitly set out that the November 26th budget will aim to provide the Bank of England with further room to cut official rates. So painful, near-term, measures such as 1p increases in the key income tax rates are now more likely, depressing GDP growth next year. The political calculation seems to have been made it is better to have a difficult fiscal adjustment early on in the life of the UK parliament, which will also help to reduce borrowing costs and hopefully allow the Bank of England to cut rates faster than the ‘gradual downward path’ set out yesterday.
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