Bank of England’s Darkening Outlook Raises Stakes for UK Budget

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(Bloomberg) — The Bank of England used its regular business survey to warn that UK Chancellor of the Exchequer Rachel Reeves will unveil her budget against a grim backdrop of weak business investment, rising unemployment and slowing growth.

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Although that echoes the picture from other business surveys, the BOE agents’ report is influential in the rate-setting process, and its warnings unusually strong. They come just weeks before Reeves is expected to raise taxes in a budget that may weigh on growth and pull down inflation. 

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Firms across the country told the bank’s network of agents that “uncertainty about potential announcements in the Autumn budget” is stalling activity. Demand is not expected to pick up “until at least part way through 2026.”

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The bank would typically respond to weak growth by cutting rates but BOE Governor Andrew Bailey urged Reeves to lend a hand by keeping a lid on regulated prices — such as water and energy bills, rail fares and vehicle excise-duty — that have been a major cause of the inflation overshoot this year.

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Lowering those will be “very important,” Bailey said in a press conference after revealing the Monetary Policy Committee’s decision to hold rates at 4% this month. The BOE estimates that 0.4 percentage points of the current 3.8% inflation rate is due to this year’s jump in regulated prices. Reeves has signaled that she is looking at the measures.

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Curbing that figure next year would help the bank move forward with rate cuts by shaving off “another half a percentage point or so from services price inflation,” Bailey said. “I do think it is a point the government has taken, about the impact that these things can have on inflation and therefore on policy setting.”

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Ellie Henderson, economist at Investec, told Bloomberg following Thursday’s MPC decision that it won’t take much for Bailey to cut, possibly in December. “If you have a budget come 26th of November that’s not just a big fiscal tightening but also the measures are disinflationary, then that could push the dial and actually convince him.”

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The BOE’s task of controlling inflation was hampered by Reeves’ first budget, which lifted regulated prices and fueled increases in food bills by hiking employment costs for retailers. The Bank’s agents’ report, collected over six weeks to early October, found that while those effects are dissipating, concerns are now rising over her upcoming plans.

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The BOE said in its Monetary Policy Report that uncertainty caused by the budget “may be causing firms to delay investment.” Another of its surveys, the Decision Maker Panel, found that the proportion of businesses warning that elevated uncertainty is causing problems was around its highest level since the aftermath of former Prime Minister Liz Truss’ disastrous mini-budget.