The UK’s new budget relies heavily on fiscal restraint and frozen tax thresholds, with weaker growth expectations and a slow return to target inflation. The tightening backdrop supports expectations of a dovish easing cycle from the Bank of England starting in December, notes Kwek Li Su An, currency market analyst at UOB Group.
The Bank of England is preparing for a 25 basis point cut on December 18
“British Chancellor Rachel Reeves presented a Budget focused on fiscal discipline amid weak growth and high inflation, prioritizing hidden tax measures and structural reforms while scrapping the planned income tax rate rise.”
“While marred by a leak from the Office for Budget Responsibility, key forecasts are for the UK to grow by 1.5% in 2025, then 1.4-1.5% to 2030 (downgraded from March), inflation falling to 2% by 2027, and borrowing falling from £138.3 billion in 2025-26 to £67.2 billion by 2030-31, with Expected surplus from 2029 – positioning the UK as a G7 leader in fiscal consolidation.
“Medium-term fiscal tightening through freezing tax thresholds and wealth taxes is likely to curb demand, supporting lower inflation and giving the Bank of England room to begin a cautious easing cycle – most likely with a 25 basis point cut at the next and final meeting of the year on 18 December, and then gradual cuts until 2026.”
