UK budget, outlook for aggressive interest rate cuts bleak | Money News

Expectations that the Bank of England will cut interest rates for the next two months in a row have been dampened by the UK government's latest budget, economists have warned.

These interest rate cuts typically reduce borrowing costs for consumers and businesses over time.

As markets digest last week's statement, the chances of a series of cuts have diminished, according to Refinitiv data. According to Refinitiv data, there is currently a 90% chance of a November cut, but a 65.2% chance of a December cut. It has fallen sharply since last week.

The budget, which expands fiscal spending to 1.2% of GDP next year, is expected to reduce the economic slump, which could help lower inflation, according to Pantheon Macroeconomics.

“The budget has erased the positive data flow over the past month, when the Monetary Policy Committee (MPC) had tabled back-to-back rate cuts in November and December,” said Robert Wood, chief economist at Pantheon.

The market reacted hostilely to last week's financial report, with the pound falling sharply and gold yields (the interest rate paid by the government) rising.

Image: Bank of England Governor Andrew Bailey gestures as he addresses the media during a press conference. Photo: Reuters

The Office for Budget Responsibility (OBR) expects Budget 2025 to add 0.5 percentage points to the Consumer Price Index (CPI).

Earlier in October, Bank of England governor Andrew Bailey suggested the MPC could take a more 'aggressive' approach to interest rate cuts if inflation indicators continued to improve. But Pantheon economists warned the MPC is now likely to proceed more cautiously, wary of the inflationary impact of the budget's fiscal easing.

Pantheon said it now expects the MPC to cut interest rates once more this year (tentatively at its meeting this week), and by 25 basis points each quarter through 2025. This is one less than previously expected.

Pantheon adds, “In all, we expect one additional cut this year at this week’s meeting.” “This is one less than expected at the time of our last forecast review. The market is taking a similar view and current prices reflect 25 basis points less easing through March than before the Budget.”

Market expectations have also changed, with easing expected to be 25 basis points lower in the year to March than before the Budget.

In the United States, the situation is different. Economists still expect two interest rate cuts before the end of the year.

Like the MPC, the U.S. Federal Reserve is scheduled to meet on Thursday, a day later than usual due to Tuesday's election, and with inflation still cooling, the Fed is expected to cut interest rates for the second time this year.

Federal Reserve policymakers led by Chairman Jerome Powell are expected to cut the benchmark interest rate by a quarter of a point, to about 4.6%, following a half-point cut in September. Economists expect another quarter-point cut in December, with further cuts likely next year.

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