Britain’s finance minister, Rachel Reeves, delivered a rare pre-budget speech on Tuesday, laying the groundwork for her November 26 budget. She described it as one of “hard choices,” emphasizing fiscal discipline and a commitment to reducing national debt. Reeves hinted at broad-based tax increases to protect public services while steering clear of a return to austerity.
Market Reaction:
The pound fell 0.5% to $1.3072 following Reeves’ remarks, extending its recent slide after posting its weakest monthly performance since July. The euro strengthened against sterling, rising 0.3% to 87.97 pence. UK government bond yields also slipped, with the benchmark 10-year gilt yield dropping as much as 5.9 basis points to 4.379%, before settling around 4.42%.
Analysts said markets largely anticipated Reeves’ tone, given growing expectations of higher taxes. London’s FTSE-100 index mirrored broader European declines, remaining in negative territory.
Why It Matters:
Reeves’ speech comes just days before the Bank of England’s interest rate decision on Thursday. Her fiscal stance provides clarity for policymakers as they weigh a potential rate cut. TD Securities’ strategist James Rossiter said the timing of the speech was deliberate, likely intended to signal policy coherence ahead of monetary adjustments.
Rachel Reeves: Framing the budget as fiscally responsible while managing public expectations on tax hikes.
Bank of England: Set to decide on rate cuts, with markets pricing less than a 40% chance of a 0.25% reduction.
Investors and Businesses: Watching for how tax and spending changes could affect investment, consumer demand, and market confidence.
What’s Next:
Reeves’ upcoming budget is expected to outline higher taxes targeting wealth and corporate profits while preserving key social programs. Markets anticipate that fiscal tightening could give the Bank of England more room to cut rates in early 2025 if inflation continues to cool.
In the short term, sterling may remain under pressure as investors price in both tighter fiscal policy and potential monetary easing. The BoE’s Thursday meeting will be closely watched for signals of a dovish turn a move that could further weaken the pound but boost equities and bonds.
Longer-term, Reeves faces the challenge of balancing credibility with growth: maintaining investor confidence through fiscal prudence without stifling a fragile post-inflation recovery. The November budget will test whether the government can thread that needle or if “hard choices” risk triggering political backlash amid stagnant living standards.
With information from Reuters.
