Growing optimism now surrounds the possibility of the Bank of England lowering interest rates in December, following the latest autumn budget announcement. The financial markets reacted quickly, with traders now almost certain that a reduction is on the way.
Earlier in the week, before the budget was unveiled, the likelihood of a cut was already strong. However, market pricing has now shifted even further, with analysts suggesting there is around a 90% chance that the Bank will reduce rates by 0.25% next month.
Budget Measures Influence Market Sentiment
The Chancellor, Rachel Reeves, revealed a package worth more than £26bn in tax increases during her budget statement on Wednesday. According to the Office for Budget Responsibility (OBR), these measures effectively double the amount of fiscal space available to the government moving forward.
The OBR’s full economic and fiscal outlook—which accidentally appeared online before Reeves delivered her speech—offered fresh projections for inflation. It expects consumer price index (CPI) inflation to average 3.5% over 2024, slightly higher than its estimate earlier in the year.
Looking ahead, the OBR predicts that CPI inflation will settle at an average of 2.5% in 2025, which is also a little above previous expectations. Despite this, it still anticipates price pressures gradually easing back to around 2% by 2027, aligning once again with the Bank of England’s target.
Why Inflation May Stay Elevated for Longer
The OBR explained that inflation may remain higher than earlier forecasts because of persistent strength in wages and ongoing service-sector inflation. These elements are expected to outweigh the impact of slightly weaker economic growth.
At the same time, some of the policies announced in the budget are likely to help reduce inflation temporarily. The OBR estimates that CPI inflation could fall by a further 0.3 percentage points in 2026 due to measures such as support for household energy costs and the continued freeze on fuel duty.
However, not all policy decisions push inflation downward. The introduction of vehicle excise duty for electric cars from April 2028 is forecast to nudge inflation up by around 0.1 percentage points in that year.
Inflation Data and Bank of England Reactions
Latest inflation figures for October showed that CPI eased to 3.6%, marking the first drop in five months. These numbers matter greatly to the Bank of England, which has kept interest rates high to bring inflation back to its 2% target.
During its November meeting, the Bank opted to maintain the base rate at 4%. However, the decision was far from unanimous. Four of the nine Monetary Policy Committee members supported a quarter-point reduction, indicating an increasing willingness to ease policy soon.
The OBR’s projections also suggest that the Bank’s headline rate could gradually fall to around 3.7% in early 2026, signalling a slow but steady decline.
Economists See Room for Further Cuts
Economists at Peel Hunt noted that this year’s autumn budget does not contain the same level of inflation-enhancing measures seen in previous fiscal statements. As a result, they believe the Bank still has scope to continue cutting rates over the coming months.
Analysts at Nomura echoed this sentiment, saying that the budget’s overall fiscal tightening totalled closer to £30bn. This was less severe than earlier predictions, which expected a tightening of up to £50bn. They also pointed out that much of the tightening will occur later in the five-year budget period.
Because the bulk of the fiscal restraint comes later, Nomura’s team believes the near-term impact on economic growth may be smaller than the Bank of England initially anticipated. This could make policymakers more confident about easing borrowing costs.
How the Budget Could Affect Monetary Policy
Nomura analysts explained that while some parts of the budget could momentarily help push inflation lower, the Bank may view these changes as short-lived. Instead, officials are likely to focus on the softer fiscal stance over the next couple of years.
They continue to expect two interest rate cuts: one in December this year and another in early 2026. This outlook aligns with the increasingly optimistic tone seen in the financial markets.
Benjamin Jones, from Invesco, offered a similar view. He noted that the budget was not as restrictive as some had anticipated, particularly because income tax thresholds remained unchanged. Even so, the overall package still leans towards reducing inflation.
A Path Forward for Lower Borrowing Costs
According to Jones, recent inflation trends are easing enough for the Bank of England to feel more comfortable resuming its rate-cutting cycle. Invesco now expects a rate cut in December, followed by slightly more easing in 2026 than money markets currently predict.
Together, these views highlight a strengthening belief across the financial sector that the Bank is likely to take action sooner rather than later. With inflation cooling, fiscal tightening spread over several years, and policy-related price pressures set to ease, conditions are increasingly favourable for a shift in monetary policy.
All eyes will now be on the Bank of England’s December meeting, which may set the tone for interest rates throughout next year and beyond.
Download NOW
4 Simple Steps To Becoming Wealthy Through Property