The tax, borrowing and spending plans announced by chancellor Rachel Reeves in Labour's first budget in more than 14 years could impact the trajectory of interest rates, experts have said.
In Wednesday's autumn statement, Reeves said she would be raising taxes by £40bn, to help restore "stability" in public finances. This included an increase in national insurance contributions for employers , as well as a rise in capital gains tax rates.
Reeves' budget plans also raised spending by around £70bn a year over the next five years, with borrowing also increasing by £32.3bn a year on average.
The Office for Budget Responsibility said its in economic and fiscal outlook , released on Wednesday, that the budget policies would push up the consumer price index inflation measure by around half a percentage point at their peak. This meant that CPI was projected to rise to 2.6% in 2025 but then "gradually fall back" to the target of 2%, the OBR said.
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Compared to its March forecast, the OBR said inflation was expected to be 1.1% higher in 2025 and 0.6% higher in 2026, "driven mainly by greater-than-expected persistence in wage growth and the impact of the near-term fiscal loosening in this budget".
"We estimate that budget policy measures increase inflation by 0.4 percentage points at their peak effect in 2026, mainly reflecting the impact of the excess demand generated by the fiscal loosening and some pass-through of employer NICs to consumer prices," the OBR said.
Inflation fell to 1.7% in the year to September, which marked the lowest rate of price growth since April 2021.
Central banks around the world, including the Bank of England (BoE), have been using higher interest rates to try to ease rampant inflation, which hit a peak of 11% in the UK in 2022.
As inflation has eased back towards the target level, the BoE has started to cut interest rates, with it announcing its first cut since March 2020 in August . The central bank decided to keep interest rates on hold in its September meeting, though it is expected that the BoE will announce another quarter percentage point rate cut at its next meeting on Thursday 7 November.
The OBR said in its outlook that it believed that the fiscal "loosening is consistent with a slightly higher path for interest rates than in our pre-measures forecast".
The forecaster said it now expected the BoE bank rate to fall from its current level of 5% to around 3.5% from 2027 onwards. Compared with its March forecast, the OBR said the bank rate was on average 0.4 percentage points high in 2025 and 2026.
Joe Nellis, economic adviser for professional services firm MHA, said that "interest rates are likely to fall slower than previously expected as a result of this budget, although we still expect to see another cut before the end of this year.
"The scale of public sector expenditure, increases in the minimum wage , and the likelihood that national insurance charges will lead to higher costs of employment, will put some upward pressure on prices."
Traders are now expecting around 95 basis points-worth of interest rate cuts by the end of 2025, down from previous expectations of 125 basis points of rate reductions.
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Goldman Sachs said it now expected the BoE to keep rates on hold in its December meeting. This outlook had changed from its previous forecast that the central bank would announce another 0.25% rate cut in December.
"Prospects for stronger 2025 growth are likely to reduce the urgency for sequential cuts in the near term," Goldman Sachs economists said in a note.
"While a cut remains possible with large downside surprises to the data between now and December — particularly on inflation — we now believe that a pause is more likely."
Central bank interest rate decisions also helps determine borrowing costs for a range of financial products, including mortgages and credit cards , as well as returns on savings.
The OBR said that it now expected mortgage rates to rise from 3.7% in 2024 to a peak of around 4.5% in 2027.
Compared to its March forecast, the forecaster said mortgage rates were set to be 0.3 percentage points higher on average over its forecasting period, "driven by our higher forecast for bank rate".
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Laith Khalaf, head of investment analysis at AJ Bell, said: "The OBR forecasts also show that budget policies will modestly push up inflation, which does make for higher interest rates, and hence mortgage rates.
"No doubt critics will seize upon this and draw comparisons with the rise in mortgage rates as a result of the mini-budget presented by Liz Truss and Kwasi Kwarteng. While gilt yields have been rising as a result of the budget, the scale of rises is as yet contained, and there is no sense of panic as there was in the autumn of 2022."
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