Inflation is steady but other indicators give cause for concern as the countdown to the UK’s Autumn budget begins
Latest insights:
Chancellor Rachel Reeves is facing mixed economic signals with the UK Autumn budget just a month away. Set for 26 November, the budget is Reeves’ opportunity to lay out the Government’s tax, spending and borrowing plans for the year ahead. The fallout from the announcement can affect the value of the pound and have a profound impact on money markets.
At the moment, economic indicators are inconsistent, complicating Reeves’ calculations on tax and spend. On one hand, the Chancellor had some good news last week as the inflation rate came in steady at 3.8%, below market expectations of 4%. On the other, the latest government borrowing figures were £7.2 billion above forecasts, potentially cutting Reeves’ room for fiscal manoeuvring.
At the moment, predictions about what the budget might contain are largely speculation, though there are hints that Reeves will have to raise taxes to close the government’s revenue gap.
Are earlier interest rate cuts on the cards?
The better news on inflation prompted investors to bring forward predictions of a UK interest rate cut. The Bank of England (BoE) uses interest rates to control inflation. Investors now think a quarter point cut could be in the offing in February if prices appear to be heading in the right direction.
It’s a similar story in the US, where the latest inflation figures show a slight rise to 3%, below expectations of a 3.1% jump. Lower inflationary pressures may convince the Federal Reserve (Fed) to continue with the monetary easing it began last month. Investors expect the Fed to announce a further 25 basis point cut this week.
Inflation and interest rates have an important impact on exchange rates, with lower borrowing rates tending to reduce the appeal of currencies to investors.
Coming up:
The Fed decision on interest rates is the most important announcement in the coming week on either side of the Atlantic. A rate decision is also expected from the European Central Bank (ECB), but with price pressures stable in the eurozone – inflation sits at a modest 2.15% – it is likely the ECB will hold rates steady at 2% for the third consecutive meeting.
In the UK, investors will continue to focus on Budget preparations, with house price (Friday) and mortgage approvals (Wednesday) data two key indicators of economic performance due this week.
