Rachel Reeves, the UK Shadow Chancellor, is getting ready to deliver her spending plans for an incoming Labour administration – an Autumn Budget – at the end of November. It’s been an unusual time—with the usual push back against any tax increase with even greater fervor. The government is already in a precarious position with high levels of public sector borrowing and an adverse climate for growth. Our take Market analysts have mostly ruled out the possibility of a budget cut come November. Like us, they don’t expect any action other than a hold at the December meeting.
The next budget is shaping up to be critical for Reeves, as it tries to get a hold on the UK’s direction on an emerging financial environment. This new data underscores the critical importance of fiscal policy as a countermeasure. Public sector borrowing surged to £18 billion in August, compared to a mere £2.8 billion in July. This remarkable increase begs a lot of important questions about sustainable fiscal policy and what taxpayers can expect.
Tax Rises and Market Expectations
As Rachel Reeves gets ready to unveil her alternative budget, the clamour for tax rises has reached a fever pitch. Analysts expect Reeves to call for tax hikes to shore up public finances. How exactly these changes have made an impact is still murky. The markets’ response is one of shock and horror. In doing so, they have definitively ruled out any further cuts this November, demonstrating a remarkable confidence amid demonstrable fiscal tightening on the horizon.
Market expectations for December’s meeting suggest that the BoE will hold the rate at 4.00%. This decision came after a unanimous 7-2 Monetary Policy Committee vote. This decision reflects the central bank’s approach to navigating economic challenges while avoiding abrupt policy shifts that could further destabilize financial markets. The prospect of a 25-basis point reduction is not implied until March 2026, signaling a cautious approach as the BoE monitors inflationary pressures and public borrowing levels.
Global Economic Indicators
Alongside the rapid political developments in the UK, other global economic indicators are impacting the market landscape. Further supporting the resilience claim, initial US jobless claims fell by 33k. They dropped to 231,000 from a week-ago revised 264,000. Continuing jobless claims also dropped that week to 1.92 million, reflecting a robust jobs market. This net change represented a drop from 1.927 million the prior week. Given how strong these figures look, the labor market will likely continue to play a big role in any Federal Reserve discussions about interest rates in future meetings.
Beyond international boundaries, major economic strategies are being shaped in Japan as well. On November 18, the Bank of Japan (BoJ) surprised markets by announcing its plan to divest US$250 billion of its actively managed ETF portfolio. These holdings have been building up since 2010. This decision is a considerable departure from Japan’s often constrained monetary policy as it attempts to whiplash through a fast-changing economic environment. After core Consumer Price Index (CPI) inflation fell to 2.7% in August, down from 3.1% in July, this decline provides valuable context to understand the Bank of Japan’s tactical choices.
International Relations and Market Responses
As economies around the world work to understand and overcome their repercussions, all eyes are on the role of international relations, especially between the United States and China. US President Donald Trump and Chinese President Xi Jinping are scheduled to hold a phone call later today. That would be their first conversation since June. This kind of dialogue can go a long way towards improving U.S. trade relations. Beyond this it could impact international market stability as both leaders face rising geopolitical stressors.
Impact to the market
Market reactions have been significant in response to these international dynamics. The USD Index closed up 0.4%, crossing a key resistance line at 97.72 and the 50-day Simple Moving Average (SMA) at 98.08. Investors are closely following these developments, knowing that they could have a major effect on currency valuations and international trade.
As Andrew Bailey, the new Governor of the Bank of England recently observed, “First, do no harm.” He stressed that any future cuts should be done slowly and prudently. This sentiment reflects a broader understanding among central bankers of the need for measured responses to evolving economic conditions while addressing inflationary concerns.