Sterling Update: Labour’s Autumn Budget

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Following the UK general election in July, this week saw the highly anticipated first Labour budget since 2010 delivered by the Chancellor Rachel Reeves. Although there was much negative press attention beforehand, it did mean that speculation around many of the budget’s outcomes began well in advance of the budget announcement, muting the FX market reaction. However, the Office of Budget Responsibility has since estimated that borrowing costs, bank rates and inflation will all go up, and that overall employment with decrease at a faster rate than before the budget. These are the key policies announced in Labour’s Autumn Budget.

· Tax increases: The budget includes £40 billion in tax hikes to address public finance deficits and fund public services. This includes a significant increase in employer National Insurance contributions from 13.8% to 15% and a reduction in the threshold from £9,100 to £5,000.

· Public investment: Over the next five years, the government plans to boost capital investment by over £100 billion, focusing on transport, housing, and research and development.

· Support for low-paid workers: The National Living Wage will increase, benefiting over 3 million low-paid workers, including 18–21-year-olds, for whom minimum wage will by increase 16.3%. Additionally, the Household Support Fund and Discretionary Housing Payments will be extended to help vulnerable people.

· NHS funding: There will be increased funding for the NHS, to support a range of commitments, including 40,000 extra elective appointments a week to reduce waiting lists.

· Fiscal rules: New fiscal rules have been introduced to ensure economic stability, including a stability rule to balance the current budget and an investment rule to reduce net financial debt as a proportion of GDP.

· Business support: The budget included some measures to support businesses, such as freezing the small business multiplier and providing relief on business rates for retail, hospitality, and leisure properties.

· Cost of living: The government committed to maintaining the State Pension Triple Lock and increasing working-age benefits in line with inflation.

Aside from the budget, the UK’s economic data releases were relatively quiet this week. Next week, however, the Bank of England will deliver its next rate decision on Thursday, with the probability of a rate cut falling from 95% on Tuesday to 79% today. The Federal Reserve will also meet on the same day, following the US Election on Tuesday 5th November.

EUR

EU year-on-year inflation has dropped from a high of 10.7% in October 2022 to 1.7% in September 2024, indicating that the European Central Bank has successfully brought inflation closer to the 2% target.

Over the past four years, we have seen the dangers of high inflation, but low inflation and deflation can also harm the economy. The ECB now faces the challenge of balancing interest rates and other measures to maintain inflation around 2%.

The latest CPI inflation data was released on Thursday. It was forecast to come in at 1.9% but came in slightly higher than expectation at 2%. This could lead to the ECB considering further interest rate cuts, which could weaken the euro.

This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.