Vanguard: Budget increases likelihood of December Rate Cut

Vanguard has offered its assessment of the UK’s latest Budget, outlining how a milder-than-expected fiscal tightening, improved headroom, and targeted household support could influence growth, inflation, and monetary policy over the coming years. Senior Economist Shaan Raithatha says the measures present a more balanced fiscal stance than anticipated, one that may bolster credibility, steady gilt markets, and subtly shift expectations for future Bank of England rate cuts.

Shaan Raithatha, Senior Economist, Vanguard, Europe comments:

“Yesterday’s Budget delivered a smaller‑than‑expected fiscal tightening—around £18bn, or roughly 0.5% of GDP—and expanded fiscal headroom to about £22bn. That combination points to slightly stronger growth next year and a softer inflation profile, helped by measures that lower household energy bills and the continued fuel‑duty freeze. 

“Taken together, the Budget is broadly neutral for monetary policy, but at the margin it increases the likelihood that the Bank of England will cut in December—taking Bank Rate from 4.00% to 3.75%—and guide towards a landing near 3.25% by mid‑2026

“Improved buffers should also support fiscal credibility, which is constructive for gilt markets. As ever, we advise investors to stay the course.”

Broader Budget Takeaways

“The Chancellor’s decision to increase the tax burden, which include extending income tax and NIC threshold freezes for three years, alongside new charges on salary‑sacrifice pensions and higher rates on dividends and property income, signals a clear intent to raise revenue without immediate demand-side disruption. Higher taxes, expected to generate roughly £26bn over the forecast horizon, will mainly weigh on household disposable income from 2028 onward. Near-term growth prospects remain supported by front-loaded departmental spending and targeted relief on energy bills.

“From a macro perspective, the fiscal stance is less restrictive than anticipated, which should cushion GDP growth in 2026. While the OBR’s downgrade to productivity growth underscores structural challenges, stronger wage and inflation assumptions improve the outlook for tax receipts, bolstering fiscal sustainability. The increased headroom—now £22bn—offers resilience against future shocks and reduces the risk premium embedded in UK sovereign debt.

“On inflation, the package is disinflationary in the short term, trimming CPI by an estimated 0.4 percentage points next year. This stems primarily from the fuel duty freeze and household energy support. For the Bank of England, this combination of slightly firmer growth and softer inflation keeps policy broadly neutral, but the balance of risks tilts toward easing. Vanguard expects interest rates to settle near 3.25% by mid‑2026, with a higher likelihood now of a cut in December

“Market reaction has been measured so far, with gilt yields edging lower and sterling modestly firmer, reflecting improved fiscal credibility. Equity markets remain largely driven by global factors, but the UK backdrop appears more stable following today’s announcements. Political dynamics will bear watching, as the reception within Parliament could influence sentiment in the weeks ahead”.