Key Market Focus for UK Autumn Budget—BOE Rate Path and Pound Sterling

(Seoul=Yonhap Infomax) Ji Yeon Kim – As the UK government prepares to unveil its Autumn Budget on the 26th, investors are closely scrutinizing Chancellor Rachel Reeves’ spending and tax plans amid heightened market attention.

Last year’s UK budget resulted in a shortfall of approximately £20–35 billion, driven by elevated funding costs and sluggish growth. This year, with limited alternatives beyond tax hikes, the market widely anticipates a significant increase in taxes.

On the 25th (local time), CNBC reported that the Autumn Budget’s impact on the Bank of England’s (BOE) rate trajectory and the pound sterling warrants particular attention.

BOE Rate Cut Expectations Rise

Analysts expect the Autumn Budget to increase the likelihood of a more accommodative monetary policy from the BOE. The inclusion of multiple tax hikes is projected to dampen both growth and inflation.

Laura Cooper, Global Investment Strategist at Nuveen, noted that the measures announced in the Autumn Budget could exert further downward pressure on the UK economy, stating, “Such growth headwinds may prompt the BOE to deliver more aggressive rate cuts than currently priced in by markets.”

Markets anticipate the Office for Budget Responsibility (OBR) will revise down the UK’s growth outlook for next year and the subsequent five years. The OBR will release updated inflation and growth forecasts alongside the Autumn Budget.

Cooper added, “While markets are pricing in two BOE rate cuts by mid-next year, we see scope for up to three, which would bring the terminal rate to around 3.25%.”

The BOE’s current policy rate stands at 4%. Markets expect a 25bp cut at the Monetary Policy Committee meeting on December 18.

Sanjay Raja, Chief Economist at Deutsche Bank, described inflation control as the “magic bullet” of this budget. He projected that the budget could lower inflation by around 40bp, increasing the likelihood of further BOE rate cuts not only in December but into next year.

Jim O’Neill, former Goldman Sachs Asset Management Chairman and UK House of Lords member, expects the government to introduce measures to curb energy and food price pressures in the Autumn Budget, aiming to bring CPI below market expectations and ultimately facilitate BOE rate cuts.

Pound Sterling Likely to Remain Weak

The pound is expected to remain under pressure following the budget announcement. The GBP/USD exchange rate is currently fluctuating around $1.31, near its lowest level since April.

Cooper noted that growth headwinds will likely keep the pound weak or at best range-bound, stating, “It is difficult to identify a catalyst for a sustained rebound in sterling.”

The pound initially weakened on reports of an income tax hike, acting as a “pressure valve,” but has failed to recover even after Chancellor Reeves withdrew the proposal, according to Cooper. She added that a risk premium remains embedded in the pound.

Persistent political instability is also seen as a factor weighing on the currency. Raja commented, “As the UK is one of the few G7 economies implementing fiscal tightening focused on tax hikes and deficit reduction, political risks are likely to intensify following the budget announcement.”

jykim@yna.co.kr

(End)