Commenting, John Wyn-Evans, Head of Market Analysis at Rathbones, says: “The latest public sector borrowing figures continue to show strain on the country's finances. Even allowing for some positive revisions to August's dreadful borrowing, the government's deficit so far this tax year amounts to £99.8bn, some £7bn higher than the projections of the Office of Budget Responsibility.
When we factor in the probable downgrade to long-term growth estimates from the OBR which will inform the Chancellor Rachel Reeves's Budget decision-making, it looks as though taxes will need to rise somewhere in the order of £25bn or more. Much as many would like that number to be lowered by spending cuts, the mood within the Labour Party does not appear to support much hope on that front.
Even so, financial market reaction today has been muted. Government bond (gilt) yields are a touch lower and in line with the performance of other countries' debt. The pound is actually slightly firmer against both the dollar and the euro than before the data was released. That might be testament to the already low expectations built into market prices. Indeed, some analysts are optimistic that the Budget could be a "clearing event" for sentiment, however painful it might be for certain groups of taxpayers, if it sets the UK on a sustainable fiscal path.
Of course, that was the hope last Autumn, and so we remain reluctant to drop our guard. With another five weeks till Budget Day, there's plenty of scope for more surprises.
One result of fiscal tightening in the Budget could be a lowering of inflation pressure, especially if the Chancellor avoids measures that will not directly impact consumer prices (such as VAT increases).
That could leave the way open for the Bank of England to be more aggressive in cutting interest rates. Market-based expectations still don't see the next reduction coming until February or March next year and then only one further cut in 2026, taking the base rate from the current 4% to 3.5%."
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