U.K. Budget Offers Some Relief but Doesn't Change Economic Outlook — Market Talk

What happened

The U.K. budget gives households some relief from the cost of living crisis, but Schroders' David Rees says it is not enough to change the economic outlook, which still justifies Bank of England rate hikes starting next week.

Confirmed

Global impact / market context

Higher interest rates raise borrowing costs for households and companies, which can slow spending and investment. For investors, the budget relief may help consumer-facing revenue at the edges, but it does not remove the pressure that rate rises put on asset prices and profits.

Analyst inference

Reduced fiscal headroom, which means less room for government spending or tax cuts without more borrowing, leaves the government exposed to rising gilt yields, the interest rate on U.K. government bonds. That matters while the U.S. economy overheats and Europe faces elections.

Analyst inference

What to watch

1. The Bank of England is expected to raise rates a couple of times, starting next week, according to David Rees, so watch the actual decision and any signal on the pace of further increases. Confirmed
2. Watch gilt yields: reduced fiscal headroom leaves the government vulnerable to further upward pressure on yields, which raises the cost of government borrowing and can spill into other U.K. asset prices. Analyst inference
3. Watch whether budget measures easing consumer prices actually reduce inflation enough to change the rate path; Rees sees little reason to revisit forecasts of resilient growth and rising inflation. Proposed

Evidence

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