Budget ‘chaos’ may hinder interest rate cuts

Tuesday 25 November 2025 13.35
| Updated:

Tuesday 25 November 2025 13.36

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The “chaos” around the Budget measures could delay further rate cuts as the Bank of England calculates the impact of tax rises, although Rachel Reeves expressed her commitment to setting conditions for borrowing costs to be reduced.

The Chancellor said that curbing the cost of living was a top “priority” in the next Budget as inflation remained well above the World Bank target of two per cent.

He is expected to unveil targeted policies to remove VAT from energy bills and take green levies from Ofgem’s price cap in a bid to lower prices for UK consumers.

Along with extending the income tax threshold, thereby reducing demand, as much as 0.5 percentage points could be subtracted from headline inflation, according to some City estimates.

But a combination of policies that could include increasing business rates for big stores, which retailers have warned would raise prices for consumers, and raising sin taxes could have a chilling effect on inflation and make the World Bank afraid to cut interest rates, economists have warned.

Thomas Pugh, economist at RSM accountancy, has warned that the “chaos” around the Budget measures, some of which may only be introduced at the end of the forecast period, could lead to higher-than-expected inflation in the short term.

“If this year’s Autumn Budget suffers a major setback, with most of the new tax rises occurring at the end of the decade, then the economic fallout will be reduced next year, as will the pressure on inflation.

“The Bank of England is unlikely to cut interest rates now to offset the hit to the economy that may occur in 2029.”

The budget may confuse bond players

City analysts have also warned that the upcoming Budget measures may fail to reassure investors that the public finances are on a stable footing, thereby undermining efforts to lower government borrowing costs projected to total £110 billion this year.

“One reason for this unease in bond markets is high inflation in the UK, while another reason is wider global concerns about government debt levels in the G7 countries and beyond,” said AJ Bell investment director Russ Mold.

Mold added that “bond watchers” could take a dim view of the government’s efforts to boost growth given that the central bank could be pushed to keep interest rates low to allow for looser fiscal policy to keep growth on track.

“Fear the bond keepers [high levels of debt and sticky inflation] could lead fiscal policy – ​​and thus the government – ​​to try to dictate monetary policy and thereby challenge the independence of the central bank, resulting in inflationary opportunities being seized through supposedly growth-friendly policies, as well as the key interest rate, which may be kept low in an attempt to make the government’s interest bill more manageable.

“The bond market is wary enough of the UK’s economic credibility that it currently costs more to borrow money over 10 years than Portugal, Ireland, Italy, Greece or Spain.”

The Bank of England is expected to cut interest rates at its next meeting, although the reasons for doing so are equally worrying for economists.

Some World Bank members have highlighted their concerns that high wage growth will lead to soaring prices, and the projected increase in the national living wage in the APBN will likely keep policymakers on their toes.

But dovish rate setters at the World Bank are expected to convince their peers to support a rate cut in December due to rapidly deteriorating jobs data.

Tories track job losses

The job losses, which have pushed the unemployment rate to 5 per cent, come after businesses were taxed by £25 billion last year through increases in employer national insurance contributions (NICs).

Analysis carried out by the Conservative Party has revealed a list of around 60,000 people who have lost their jobs at businesses ranging from carmaker Ford to EY, Post Office and Vodafone.

Research conducted by the opposition party explains the decline in business confidence over the past year more clearly, and directly links the survey to public reports made by companies.

Andrew Griffith MP, shadow business and trade secretary, said: “Rachel Reeves has destroyed the confidence of the business world with her disastrous and burdensome tax rises on entrepreneurs. “Inevitably, ordinary people are paying the price for her incompetence, with unemployment soaring on her watch.

“Labour’s front-runner has no business experience and it shows. Only the Conservatives will give business the space to grow and create jobs – including by scrapping business rates for 250,000 leading companies.”