The UK budget has caused a political storm but market reaction to last week’s announcement has been muted
Latest insights:
The budget had the potential to cause significant nervousness among money market investors, but early evidence suggests Chancellor Reeves’ tax and spending plans have been met with relief.
There has been much debate about whether or not Chancellor Rachel Reeves broke Labour’s pre-election tax promises in Wednesday’s pivotal budget. What’s not in doubt is that markets have so far reacted calmly to the plans, which will raise around £26 billion in additional taxes to fund welfare programmes and close the UK’s fiscal gap.
Money markets were generally reassured by what many have seen as a disciplined approach to tax and spend, and the pound strengthened by around 1% against the dollar through last week. Sterling also rose against the euro, though remains over 5% down over the last year.
Budget politics are still playing out, with Reeves forced to defend her plans against accusations that she downplayed the state of public finances in the run up to the statement. One source of relief, however, will be the muted reaction of markets, suggesting investors have some confidence that economic stability can be maintained.
Rate cuts expected in the UK and US:
The budget did nothing to shrink growing expectations of a Bank of England (BoE) rate cut in December. Rates were held at 4% in November but easing inflationary pressures have made a quarter point cut before the end of the year more likely.
Elsewhere, steady inflation in the eurozone means the current 2.15% rate is unlikely to be adjusted until well into 2026 at the earliest. By contrast, evidence of a softening US economy means most investors are now pricing in a further quarter point cut in December. Interest rate decisions are a key factor in exchange rate fluctuations.
The week ahead:
- Important data releases in the US this week include the ISM manufacturing (Monday) and service (Wednesday) PMIs. PMIs are snapshots of economic activity based on business leader surveys, and both are expected to show a modest slowdown.
- In the EU, new inflation figures, due on Tuesday, could lead to money market fluctuations.
- In the UK, analysis and fallout from the budget will stretch into a second week, with Prime Minister Keir Starmer expected to back his Chancellor’s plans in a speech on Monday.
