British Autumn Budget 2025: Implications for BoE Policy and the Pound in the Short Term

On 26 November 2025, UK Chancellor Rachel Reeves presented the Autumn Budget 2025 to Parliament, aiming to bridge a fiscal gap estimated at £20–30 billion amid slowing economic growth and elevated inflation. The budget, featuring tax hikes totaling £26 billion—including a three-year freeze on personal tax thresholds, increased National Insurance contributions for businesses, and reforms on property and capital gains taxes—extends beyond domestic finance. It carries immediate implications for the Bank of England’s (BoE) monetary policy and the near-term performance of the pound sterling (GBP). Analysts note that the new fiscal tightening could pave the way for interest rate cuts, helping to control inflation but exerting downward pressure on the currency.

Fiscal Tightening Could Accelerate BoE Rate Cuts

The Autumn Budget is widely expected to support a faster pace of interest rate reductions at the BoE. Fiscal restraint acts as a disinflationary force, giving the Monetary Policy Committee (MPC) more room to relax policy without stoking inflation. Tax increases and spending reductions are projected to lower inflation by up to 0.5% in Q2 2026, according to the Office for Budget Responsibility (OBR). This has bolstered market expectations of a 25 basis point rate cut in December 2025, with deeper reductions possible in 2026 as inflation is forecasted to fall from 3.6% in October 2025 to 2% by Q1 2027. While tighter fiscal policy supports potential monetary easing, it also raises concerns over growth prospects, putting the pound in a vulnerable position.

The BoE’s November 2025 report highlighted that the sluggish economic growth (0.1% in Q3) partly reflected pre-budget uncertainty. The budget’s disinflationary measures are expected to mitigate inflation pressures, allowing previous rate hikes to exert their “peak effect” on demand. Government borrowing costs have already fallen, with 10-year gilt yields dropping to 4.5% post-announcement, but heightened taxes may curb investment, posing a risk of further slowdown.

Near-Term Pressure on the Pound

In the immediate term, the pound faces downward pressure due to anticipated faster rate cuts, with sharp volatility expected in the weeks following the budget. Rising taxes are likely to accelerate and deepen BoE cuts, potentially pushing GBP/USD toward 1.3000. The pound did experience a temporary rebound to 1.3177 against the dollar after the announcement, benefiting from an additional £22 billion fiscal space that lowered bond yields and restored some confidence in fiscal sustainability. However, if the tax burden slows growth, the BoE may have to implement larger cuts, keeping the currency under pressure.

Measures designed to offset inflation, such as a 75% reduction in energy bills from £1,755 to £1,665 in April 2026, may encourage the BoE to act more aggressively on rates. While these steps support domestic consumption, they may reduce the attractiveness of the pound to foreign investors, creating further downside risks if growth fears intensify. Market expectations suggest short-term spikes if the budget is perceived as credible, but a longer-term slide toward 1.3000–1.3200 is likely if taxes weigh on economic activity.

Interaction of Fiscal and Monetary Policy

The effectiveness of the budget depends on its interplay with monetary policy. The additional fiscal space allows the BoE to focus on stability without undue concern over public debt. Reduced inflation also lowers debt servicing costs, cutting borrowing by an estimated £2 billion in 2026–27. The central bank is likely to maintain the current 4% rates before starting gradual cuts in December, supported by the lingering effects of previous rate hikes. The pound is expected to see a neutral-to-mildly negative impact, as fiscal tightening eases bond yield pressures but may constrain business investment. Failure to close the fiscal gap could push yields higher and weigh on the currency, reminiscent of the 2022 budget scenario.

Global Context and External Factors

International factors, including US trade policies and ongoing geopolitical tensions, add complexity to the BoE’s decision-making. Slower productivity growth from 1.3% to 1% and lingering post-Brexit and post-COVID debt pressures limit room for expansive fiscal measures. The pound’s performance will therefore hinge on international confidence, with risks of depreciation if the budget is perceived as growth-unfriendly.



The Autumn Budget 2025 positions the Bank of England for potential rate cuts, helping to moderate inflation but exerting short-term pressure on the pound, with fluctuations likely between 1.3000 and 1.3200 against the dollar. The combination of tight fiscal policy and easier monetary policy creates a challenging environment for the currency, though additional fiscal space may limit the downside. If successfully balanced, the budget could mark a turning point for stability; if not, it risks deepening the economic slowdown.