British Pound: What Is the Outlook With a Neutral Budget and Higher BoE Rates Ahead? – ABN AMRO

Persistent inflation is likely to prompt two more Bank of England (BoE) rate hikes, bringing Bank Rate to 4.25% by February 2027, according to ABN AMRO economists Bill Diviney and Adrian Quinn. They expect resilient growth to support continued fiscal consolidation in the United Kingdom (UK), with GDP expanding by 1.4% in both 2026 and 2027. In their view, a fiscally neutral Budget is likely to have limited macroeconomic implications.

Can UK resilience support fiscal consolidation as further BoE hikes loom?

"Following the Liz Truss debacle of 2022, The UK has emerged as something of a model student on fiscal consolidation. The primary deficit is expected to narrow from 4.0% of GDP in 2024 to 1.2% in 2026, an improvement of almost 3 percentage points in just two years. This has been driven by the withdrawal of temporary support measures following the 2022-23 energy crisis, frozen personal tax thresholds and last year’s increase in employer National Insurance contributions."

"Despite facing the same challenges that many of its global counterparts are experiencing – surging bond yields, prolonged inflation, and fiscal tightening – the UK economy has been remarkably resilient this year. On the output side, services, particularly professional and ICT, have been important contributors to growth. Added to solid growth in investment (we suspect linked to AI capex) and an uptick in private consumption – reflecting a decline in consumer caution – we expect the economy to expand by 1.4% this year, and by the same amount in 2027."

"Our base case of a cautious and fiscally neutral Budget means that its macro implications are likely to be limited. Targeted household support will aim to cushion the real-income impact of the energy shock, while selective and modest revenue measures are unlikely to have a dampening impact on an economy with solid growth momentum. Inflation is expected to stay elevated – we see a peak above 4% by early 2027 – but the budget is likely to be neutral on that front."

"As for rates, we continue to expect the BoE to hike twice over the coming months to get ahead of a de-anchoring of inflation expectations, ultimately taking Bank Rate to 4.25% by February."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)