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Inflation expectations are revised downward slightly, and the Bank of England’s room for interest rate cuts is still subject to multiple constraints
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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Decision Analysis]: Inflation expectations are slightly revised downwards, and the Bank of England's interest rate cut space is still subject to multiple constraints." Hope this helps you! The original content is as follows:
The British Treasury officially announced the latest budget plan for 2025 on Wednesday, with "tax increase and open source + price regulation" as the core framework. On the one hand, it curbs the expansion of public debt through structural fiscal and tax reforms, and on the other hand, it introduces targeted relief measures for people's livelihood to ease price pressure, aiming to pave the way for the Bank of England's (BoE) monetary policy adjustment, thereby reducing the government debt interest burden. However, many experts from mainstream economic institutions spoke out intensively after the plan was announced, pointing out that although some of the measures in the budget can moderately suppress inflation in the short term, it will be difficult to fundamentally solve the structural contradiction of rising prices in the long term. The Bank of England's interest rate cut process will still face multiple constraints, making it difficult to achieve substantial acceleration.
Chancellor Rachel Reeves elaborated on the core elements of the plan during her budget speech in Parliament. According to the plan, the budget will optimize the tax structure and strengthen tax collection and management for high-income groups and enterprises. It is expected that by 2030, the cumulative new tax revenue will be approximately 26 billion pounds (about 34.4 billion U.S. dollars at the current exchange rate). This fund will mainly be used to fill the public finance gap, optimize the public service expenditure structure, and reduce the government’s dependence on debt financing. In terms of price control that directly benefits the people, the plan clearly introduces a railway fare freeze policy, covering major trunk lines and regional railway networks across the country, which is expected to save xm-forex.commuters an average of about 300 pounds in travel costs every year. In addition, the government will continue the temporary subsidy mechanism for household energy bills, expand the scope of food price supervision, and focus on cracking down on hoarding and price gouging in supermarkets. Reeves emphasized in his speech: "This budget is a key measure to xm-forex.combat inflation through sound fiscal policy.It will lay a solid foundation for price stability and bring immediate economic relief to ordinary families through targeted relief, achieving the dual goals of fiscal sustainability and people's livelihood security. ”
As the UK’s independent budget assessment agency, the Office for Budget Responsibility (OBR) simultaneously released an economic impact assessment report on the budget. The report shows that a series of policy xm-forex.combinations launched by the British government since March 2025 (including new measures in this budget) are expected to drive the inflation rate down by 0.3 percentage points in 2026 xm-forex.compared with the baseline scenario, including the freezing of railway fares and the extension of energy subsidies. Continued direct price control measures contributed about 60% of the suppressive effect, while the indirect effect of tax increase policies on reducing inflation by suppressing aggregate demand was relatively mild. The OBR also pointed out that this downward revision of inflation was in line with market expectations, and there was no unexpected policy dividend.
It is worth noting that while this budget targets inflation control, it also hides potential factors that may push up prices, which has become a constraint on the Bank of England. Key variables for interest rate cuts. In the budget, Reeves announced two important adjustments to people's livelihood policies: First, the total cancellation of the welfare limit for families with multiple children is expected to increase monthly subsidy income for about 400,000 families, with an average increase of about 150 pounds per household; second, the national minimum wage will be raised by 7.5% to 12.8 pounds per hour, covering about 2.5 million low-income workers. However, in the view of some economists, it may intensify labor market cost pressures in the short term and further affect price stability through consumption transmission. Michael Saunders, a senior consultant at Oxford Economics and a former member of the Bank of England's interest rate decision-making xm-forex.committee, bluntly stated in his latest analysis report: "The actual impact of this budget on monetary policy will be quite limited. The downward revision of short-term inflation mainly relies on administrative price controls and lacks structural intervention in the root causes of inflation. The cost pressure brought by welfare and wage adjustments may offset part of the inflation suppression effect in the future, making it difficult for the Bank of England to start a sustained interest rate cut cycle. ”
Sanjay Raja, chief economist of the UK at Deutsche Bank, gave a relatively neutral judgment. He believed that the downward pulling effect of this budget on inflation may be the biggest impact of British government policies on short-term prices since the establishment of the OBR in 2010. The largest single impact. “Measures such as railway fare freezes and energy subsidies directly affect the core xm-forex.components of the Consumer Price Index (CPI), and will have a significant inhibitory effect on inflation in the short term, which provides some room for the Bank of England to conduct a symbolic interest rate cut in December. "Raja added, but the sustainability of this effect is questionable, and we still need to pay attention to external variables such as the labor market and energy price fluctuations in the medium and long term.
Robert Wood, the UK head of Pantheon Macroeconomic Consulting, issued a more cautious warning. He pointed out that some of the inflation suppression measures in the budget are temporary. For example, the government's policy of suspending fuel tax increases is only valid until the end of 2026. If the increase is subsequently resumed, it may be directlyThis has triggered an increase in transportation costs, which has been transmitted to many industries such as logistics and retail, leading to a rebound in inflation. "The short-term price stabilization trend has basically locked in a small interest rate cut in December, but in the longer term, the budget will have minimal changes to the Bank of England's core inflation outlook for the next two years. Structural problems such as high service industry inflation and tight labor market have not yet been resolved, which will seriously limit the depth and pace of interest rate cuts." Wood emphasized.
The research team of BNP Paribas further refined the analysis in a report sent to clients, believing that there is a clear structural differentiation in the effect of this budget on inflation. "Budget measures have a relatively concentrated effect on boosting inflation in the energy sector. They directly reduce residents' energy consumption costs through subsidies and price controls, but they have little direct intervention in the stubborn service industry inflation that the Bank of England is most concerned about." The report pointed out that British service industry inflation has been above 5% for 18 consecutive months. The core crux is structural problems such as labor shortages and supply chain bottlenecks. However, this budget does not introduce targeted solutions, and some measures may even intensify price pressure in the service industry by pushing up consumer demand. "These measures will have little effect on cracking the stubborn inflation problem in the British service industry, and some measures may even make matters worse. They can only provide a short-term policy buffer for the Bank of England and are difficult to change the medium- and long-term inflation trend." Based on this judgment, BNP Paribas predicts that the Bank of England will cut the benchmark interest rate twice before the end of the first quarter of 2026. The cumulative interest rate reduction will be 50 basis points, which is far lower than the 75 basis points previously expected by the market.
Looking back at the 2024 British Budget, the Reeves government raised corporate payroll taxes and implemented strict controls on rising utility bills. Although this policy xm-forex.combination suppressed inflation in the short term, it also led to a rebound in inflation in early 2025. Affected by this, the Bank of England's current benchmark interest rate remains at 5.25%, which is more than twice the European Central Bank's benchmark interest rate (2.5%). The high interest rate environment has not only pushed up the British government's debt interest burden - the British government's debt interest expenditures currently account for 3.8% of GDP, far exceeding the Eurozone average of 1.9% - but also caused continued pressure on corporate investment, real estate market and other fields. From this background, one of the core demands of this budget is to create conditions for the Bank of England to cut interest rates by suppressing inflation, thereby reducing overall borrowing costs, reducing the proportion of tax revenue used for debt interest payments, and forming a virtuous cycle of "downward inflation - lower interest rates - relief of debt burdens - expansion of fiscal space". However, judging from market feedback, the realization of this goal still faces many uncertainties. The Bank of England's future monetary policy adjustments still need to seek a delicate balance between inflation control, economic growth and debt sustainability.
The above content is all about "[XM Foreign Exchange Decision Analysis]: Inflation expectations are slightly lowered, and the Bank of England's interest rate cut space is still subject to multiple constraints". It is carefully xm-forex.compiled and edited by the XM Foreign Exchange editor. I hope it will be helpful to your trading! Thanks for the support!
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