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This week’s Market Snapshot
Investors weigh up implications of UK Budget
The much-anticipated UK Budget seeks to reassure market about public finances, but concerns remain around the long-term growth outlook.
- UK government announces £26bn in tax rises that will push tax take to 38.3% of GDP by the end of this parliament.
- Budget seeks to ensure UK has about £22bn in fiscal headroom and reassure investors that public finances are on a sustainable path.
- Expectations rise for December interest-rate cut to boost sluggish growth.
Investors have been weighing up the implications of the UK government’s much-anticipated Budget, announced by chancellor Rachel Reeves on Wednesday, which included £26bn in tax rises.
The increases – to be implemented by 2029-30 – include a freeze of income tax thresholds, a raid on salary sacrifice schemes and a range of more minor measures, which should comfortably offset extra spending of £11.3bn.
The tax hikes follow £40bn in rises in last year’s Budget – and are expected to push the government’s tax take a record high of 38.3% of GDP by the end of this parliament, according to the independent Office for Budget Responsibility (OBR).
The tax and spend measures seek to ensure the government has £22bn in fiscal headroom — the buffer within its self-imposed debt rules – as Reeves bids to reassure investors that the UK’s public finances are on a sustainable path.
“The chancellor delivered a bigger-than-expected fiscal buffer (coming in at £22bn versus the £15bn markets anticipated). But this will depend on heroic growth assumptions, which markets will scrutinise closely,” says Filippo Alloati, Head of Financials – Credit at Federated Hermes Limited.
The benchmark 10-year gilt yield – which hit a 16-year high in January – dipped over the last week, before inching back up to 4.47% at 16:30 GMT on Thursday1. “The initial gilt rally faded as investors realised many tax hikes are backloaded. This will raise questions about near-term fiscal credibility,” Alloati adds.
Figure 1: UK 10-year gilt yield moderates
The pound inched up after the budget, and stood at £1.32 against the US dollar and £1.14 against the euro at 15:00 GMT on Thursday2.
The FTSE 250 mid-cap index – which is closely tied to the domestic economy – has risen about 3.5% over the last week, while the large-cap FTSE 100, which derives three-quarters of its revenues from overseas, was up 1.8% over the same period at close on Thursday3.
UK inflation fell to 3.6% in October, bolstering the case for the Bank of England (BoE) to cut interest rates next month to boost growth. The BoE opted to keep rates unchanged at 4% in November, with the Monetary Policy Committee (MPC) split five-four. The next BoE Monetary Policy Committee meeting is scheduled for 18 December. “We expect inflation to continue to go lower over the next year and that’s one reason why we now expect a rate cut by the BoE in December,” says Gary Skedge, Head of UK Liquidity Strategies, Federated Hermes.
“With inflation in the UK past its peak and softer data emerging, the BoE now has room to cut rates, likely 25bps in December and another in early 2026,” says Alloati. “If, as the BoE expects, we’re past peak inflation, borrowing costs should ease gradually.”
The OBR’s downgrade of 2026 growth was expected and it underpins the UK’s structural growth challenge
The OBR has increased its UK GDP growth forecast for this year to 1.5% (from 1%), but slashed its growth outlook for 2026 to 1.4% (from 1.9%).
“The OBR’s downgrade of 2026 growth was expected and it underpins the UK’s structural growth challenge,” Alloati adds.
The Budget also included a 4.1% rise in the minimum wage next year. “We understand the arguments for raising the minimum wage but the knock-on impact could be difficult for some employers and, as a result, we could see the unemployment rate (which rose to 5% in Q3) edge up further,” Skedge says.
“The UK’s long-term growth outlook remains a big concern”, he adds.
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1 Bloomberg as at 27 November.
2 Ibid.
3 Bloomberg (21-27 November).
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