Reeves Sees Reward in Keeping Lid on UK Inflation in Budget

mk1s)d41gjara6p]90b8{k1f_media_dl_1.png ONS, BOE

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(Bloomberg) — Rachel Reeves stands to be the biggest beneficiary of her own efforts to bring down UK inflation and help with the cost of living in this month’s budget — but only if she gets it right.

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The Chancellor of the Exchequer said this week she was focusing inflation-busting efforts on energy and food prices, suggesting there would be measures in the budget to address gas and power bills and boost retailers. The aim is to steer the rate of price rises back toward the Bank of England’s 2% target, setting the conditions for further cuts in interest rates.

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“The two biggest things that weigh on people’s mind when they think about the cost of living are food prices and energy prices,” Reeves said on Tuesday in London. She touted reforms to business rates to help high street retailers, and said the government wants to “ease” energy prices that are “still very high for people.”

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Reeves has a challenging balancing act to perform on Nov. 26 as she seeks to plug a fiscal hole as big as £35 billion without stifling the growth she and Prime Minister Keir Starmer say is their No. 1 goal. Her efforts to close a similar gap last year have been blamed for contributing to the inflation issues she now faces.

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Economists expect Reeves to unveil measures that could actively lower consumer price inflation by as much as 0.5 percentage points, enough to get inflation back to the target by the second half of next year. If the most optimistic forecasts are right and the BOE cuts interest rates to 3%, Reeves could bank around £10 billion at next year’s budget in lower borrowing costs, when compared with the 3.8% interest rate floor forecast by the Office for Budget Responsibility in March, the watchdog’s ready reckoners show. 

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“The prize for the UK government of translating its encouraging talk on controlling inflation into budget action is a path to up to 100 basis points of UK interest rate cuts in 2026, and a potential cyclical upswing,” Panmure Liberum Chief Economist Simon French wrote in a note. He remains “unconvinced” Reeves can do it, however. Rates are currently 4% and the BOE is expected to leave them on hold on Thursday.

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Reeves has made no secret of the fact she wants to engineer inflation lower. She told UK reporters in Washington last month that she’s looking at a range of policies in the budget to tackle the current “too high” rate, saying the government has a “role” to play on regulated prices, such as energy bills, rail fares and fuel duty. 

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That new focus stems in part from her bearing some of the blame for the spike in inflation over the past year to 3.8% from 1.7%. Reeves’ latest push on inflation is “a clear confession that this was a policy failure in her October 2024 Budget,” French said.

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Businesses passed the cost of her £26 billion payroll tax rise and minimum wage hikes onto prices, with even the BOE citing them as an obstacle to cutting rates. In August, the central bank said government regulated prices, particularly water and energy bills and Vehicle Excise Duty, added 0.6 percentage points to inflation, “masking some of the disinflationary progress in the first half of this year.”