U.K. Budget Pleases Bond Markets; Bank of England to Cut Rates in December, Says ABN Amro

06:50 AM EST, 11/27/2025 (MT Newswires) -- The United Kingdom Finance Minister Rachel Reeves made her "hotly" anticipated annual budget announcement on Wednesday, said ABN Amro.

In it, she laid out a host of revenue-raising measures that kick in largely later in the budgeting horizon (2028-30). There was little surprise in the details, with the freezing of income tax thresholds to 2029-30 being the biggest change, wrote the bank in a note.

Where Reeves did surprise -- and positively -- was in the amount of estimated headroom she has built up against her fiscal rules, stated ABN Amro. The primary fiscal rule is that the debt ratio must be falling by year four of the forecasting horizon.

The government now has a headroom of 22 billion pounds against meeting this rule, or 0.6% of gross domestic product, more than double that of the previous budget of 10 billion pounds headroom and approaching that of the historic average of 29 billion pounds. This led the Office of Budget Responsibility (OBR) to modestly raise its probability of the government meeting the fiscal rules to 59% from 54% previously -- still on the low side, but an important step in the right direction in the bank's view.

One major criticism of this budget has been the backloaded nature of fiscal consolidation, pointed out ABN Amro. While it's true that this raises the risk of slippage, both in terms of execution and due to the greater degree of forecast uncertainty, the bank thinks it's appropriate in light of the nature of the changes that led to this fiscal consolidation to begin with, which was the downgrade to the OBR's long-term productivity assumption.

The OBR now projects long-run productivity growth of 1% annually, down from 1.3% previously. This material downgrade was clearly well overdue in light of the persistent weakness in productivity, added the bank.

All told, ABN Amro thinks the government did what it needed to do to keep U.K. bond markets on side, with 10-year gilt yields having fallen 7bps since the announcement. While there is naturally some risk to this more backloaded fiscal consolidation round, it comes on top of an already considerable effort -- such as the rise in employer national insurance contributions early this year -- and is underpinned both by more cautious OBR growth assumptions as well as more fiscal headroom.

The most consequential measure in Wednesday's budget from a monetary policy point of view was a fall in household energy bills, with the government now part-funding the renewables levy on energy bills. This, alongside other measures, will lower inflation by 0.3pp next year, predicted ABN Amro.

Already, financial markets had been pricing a higher risk of a December cut after somewhat more benign incoming data. Barring a big upside surprise in the November inflation data -- released Dec. 17 -- ABN Amro now expects the Bank of England's policymakers to lower Bank Rate by 25bps to 3.75% when they meet on Dec. 18.

Looking beyond that, while inflation is expected to move lower in the course of 2026 -- helped by generally lower energy prices -- the bank believes any flirtation with the BoE's 2% target will prove short-lived and that inflation will move higher again in 2027.

As such, following the likely front-loaded December cut and another cut in the first half of 2026, ABN Amro sees limited scope for the BoE to lower rates further.

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