پیش‌نمایش بودجه پاییزی بریتانیا: آیا هیلی می‌تواند بازارها را آرام کرده و انتظارات برای افزایش نرخ بهره BOE را تغییر دهد؟

The UK autumn budget is coming up on 28 October, just a week before the BOE's next monetary policy decision . And with inflation concerns still hanging over the economy , the government's fiscal plans could have a say in how interest rate expectations develop over the coming months.

For now, traders are pricing in roughly 99% odds of a 25 bps rate hike at the November meeting next week. So unless something really unexpected happens, that decision looks pretty much settled. As for December though, that is another story. Traders are currently pricing in around 47% odds of another rate hike before the year is out. That's essentially a coin toss and the autumn budget could be one to help tip expectations one way or the other.

For starters, the general expectation is for a fairly cautious budget - one with modest tax increases and targeted support for households rather than any major spending commitments.

The backdrop is one where the government's fiscal headroom is looking rather uncomfortable. According to EY, that buffer against the government's fiscal rules has shrunk from £23.6 billion in March to an estimated £11.3 billion. That is largely because of higher borrowing costs and the economic fallout from the Iran conflict.

The latest Reuters survey suggests that Healey should try and rebuild that buffer to around £15-16 billion to reassure bond investors. So, that at least gives us some useful benchmark for judging the budget.

On taxes, Healey is possibly going to lean on an increase in the levy on bank profits as the main expected revenue-raising measure. There has also been speculation about extending the mansion tax to properties valued above £1.5 million, down from £2 million currently.

Meanwhile, targeted energy subsidies for lower-income households, relief on electricity bills and a possible extension of the fuel-duty cut are among the measures in focus. The question now is how much relief Healey can offer without adding to borrowing. After all, markets are already expecting a relatively restrained budget, so any larger-than-expected spending commitments could quickly raise concerns about how they will be funded.

Now, any measures that directly reduce household energy bills or fuel costs could also help ease near-term inflation pressures, thus potentially taking some pressure off the BOE. However, cash subsidies might simply end up bolstering household spending instead. So, the details and how the government intends to fund them will matter.

As for spending, Healey is expected to hold back on bigger commitments involving housebuilding, defence and public services, with many decisions potentially pushed into 2027. As such, that should offer some reassurance to gilt investors - provided that the government's borrowing forecasts also hold up.

In that regard, the OBR's updated forecasts on inflation, growth, and overall borrowing will also be heavily scrutinised as those projections will help markets judge whether the fiscal outlook is improving or deteriorating. If higher inflation and borrowing costs leave the fiscal outlook looking worse despite the government's restraint, then gilt yields could still come under pressure.

In looking at all of this, I would argue that the key for markets is trying to distinguish between yields rising because of inflation expectations and yields rising because investors are worried about fiscal credibility. The two angles carry very different implications for monetary policy in their own right.

A credible budget that limits borrowing, restrains demand and eases near-term energy inflation could encourage traders to scale back BOE rate hike bets for December and maybe next year. But if the fiscal package adds to inflation pressures, then markets could easily become more convinced that another rate hike is necessary.

Given what is priced in ahead of the budget, the November rate hike is largely a done deal and the bigger repricing opportunity lies with the December decision.

That being said, this is just one piece of the puzzle. UK inflation and labour market data will continue to be key factors in driving market expectations and they will continue to be major influences for the December outlook, as well as for the one next year.

This article was written by Justin Low at investinglive.com.