WeekWatch

A UK rate pause, not a hard stop

The Bank of England (BoE) last week chose to keep the base rate unchanged at 4%, despite the hopes of many that a cut would be on the cards. Yet the decision was close. Four members of the rate setting Monetary Policy Committee (MPC) voted for a reduction, while five voted to keep rates unchanged.

While some analysts had predicted the BoE would cut rates, they were in the minority. Any surprise move to cut would have likely had an impact on the value of the pound and UK government bonds. In the event, these were little changed after the MPC decision.

Currently UK consumer inflation stands at 3.8%. This compares to the BoE’s inflation target of just 2%. Normally, in such a scenario central banks are keen to keep interest rates high to discourage too much spending. Cutting rates could potentially fuel further bouts of inflation. However, the closeness of the vote suggests an interest rate cut could be on the cards in December.

Slower wage growth, rising unemployment

It says much for the heightened expectations ahead of the UK Budget later this month – and leaks of a likely 2p rise in the rate of income tax for higher earners – that a rate cut was even considered by markets.

A major reason for this is that UK wage growth is slowing, while the unemployment rate is climbing. This is according to the statement accompanying the MPC decision. A further consideration is that many firms have already passed on most of their recent cost increases to customers. As a result, the BoE believes consumer inflation (CPI) has now peaked and will start easing in the months ahead.

Budget causing BoE caution

The BoE forecasts UK CPI will fall to 3.2% by March 2026. Yet central bankers are by nature cautious. Carlota Estragues Lopez, equity strategist at SJP, describes the BoE’s move not to cut as “a data-driven decision based on the fact that inflation is very high. I think they want to see a bit more data before being comfortable about cutting rates further”. Carlota also highlights the impending Budget as an inevitable further consideration. While it was not explicitly referenced by the BoE, she adds “the upcoming Budget would have contributed to its wait-and-see mode”.

Even excluding the closeness of the MPC vote, the accompanying statement signalled that further rate reductions are on their way. Greg Venizelos, fixed income strategist at SJP, notes that market expectations for a December rate cut are now close to 70%. He says: “Assuming the next set of inflation data confirms that inflation has peaked, the MPC will be in a much more comfortable position to cut rates in December. It could be needed – the Budget is likely to prove a growth dampener on the economy.”

Are bubble fears overdone?

It’s been a bad week for tech investors. In the US, returns for the tech-focused Nasdaq-100 index were the worst since April’s ‘Liberation Day’ tariffs. The pain wasn’t confined to the US, with many tech and AI-linked companies in Asia also ending lower. Talk of overvalued tech shares and fears of a bubble which could eventually lead to a painful sell-off have increased in recent weeks, even as many shares have continued to march higher. The widely publicised move by hedge fund manager Michael Burry (made famous in the film ‘The Big Short’), to place large bets on tech stocks that will pay off if the shares fall in value, has added to this renewed ‘risk-off’ sentiment.

But trying to link current valuations in the technology sector to those during the dot com era is a mistake, believes Carlota. “Many of today’s tech firms are supported by really strong earnings and we are seeing that in the third quarter earnings results. If you look at valuations in the 2000s, some of these were as much as 80 times the price-to-earnings ratio. Now, many better-quality companies are trading on an equivalent ratio of 20-30 times. What is going on with AI is very much a broader shift in the markets. Yes, there are pockets of optimism reflected in some tech valuations that are extreme but these in time should normalise. Of course, technology is only a part of a well-diversified portfolio.”

US shutdown breaks records

The current US federal government shutdown, which began on October 1, is now the longest on record. Up to 750,000 government workers are not being paid. One latest repercussion has been the move to reduce flight traffic by up to 10% at 40 airports around the country for safety reasons. Neither air traffic controllers or airport security are receiving salaries during the shutdown and some are not reporting for work, so this move is all about safety. Another feature differentiating this shutdown is that some government workers sent home without pay may permanently lose their jobs when the shutdown is resolved. There are signs the shutdown could nearly be over after some Democrats in the Senate voted in favour of a compromise bill.

It is easy to see how the accumulated uncertainty and disruption as a result of the shutdown can have adverse effects on the US economy. Some analysts have suggested that each week the shutdown continues could reduce economic growth (GDP) by c.0.1%. This adds to the pressure on the US central bank (Fed). It is trying to assess the state of the economy but is cut off from a lot of national and regional data on employment and inflation which is not being collected during the shutdown. Despite these concerns, markets currently see a 70% chance of a 0.25% rate cut by the Fed next month.

Expectations of UK tax rises grow

This weekend saw widespread reports that chancellor Rachel Reeves will target pension savings in the forthcoming Autumn Budget. Reeves is believed to be considering capping the amount that people can save into their pension under salary sacrifice schemes to just £2,000 a year.

Contributions made through salary sacrifice are currently exempt from national insurance for both employees and employers. Up to £60,000 of a person's salary can be contributed each year under existing rules, enabling people to bring down their tax liability while saving for their retirement. Such a move could potentially raise up to £2 billion a year, according to reports.

This comes on top of increased expectations of a rise in income tax, after Reeves submitted her latest spending plans to the Office for Budget Responsibility (OBR).

Reeves reportedly told the OBR of her intention to raise personal taxation, as part of a wide range of tax and spending measures due in the Budget. The OBR assesses the potential impact of the measures before giving the government its view today.

It follows Reeves’ decision to deliver an unusual ‘pre-Budget’ speech on Tuesday of last week. In the address from Downing Street, she refused to rule out breaking Labour’s manifesto by raising one or more of the three ‘big’ taxes – income tax, national insurance or VAT. Instead, Reeves said she would be forced to make tough choices in the forthcoming Budget, blaming the deteriorating economic backdrop.

The chancellor set out her three main priorities as cutting NHS waitlists, bringing down the cost of living and reducing the UK’s substantial national debt. Currently this stands at about £2.9 trillion – equivalent to 95% of GDP.¹

To achieve any of the stated priorities, Reeves needs to raise significant revenues. This comes on top of a fiscal deficit economists believe to be between £20-30 billion.

Including the rise in personal tax in a submission to the OBR seems the clearest sign yet the chancellor is preparing to break Labour’s manifesto promises.

Parents face tough financial decisions

Parents could be forced to delay their retirement plans to financially support their children, according to Chapter 2 of SJP’s Real Life Advice Report 2025.

For the report, Opinium surveyed 8,000 people between 22 July 5 August 2025 to find out how their attitudes to money, financial advice and the future had changed over time. Quotas and post-weighting were applied to the sample to make the dataset representative of the UK adult population.

The report highlighted a third (31%) of parents believe they will have to delay their own retirement plans to continue supporting their children. Meanwhile, four in 10 (39%) expect to do so while in retirement.

A quarter of parents believe they will have to use their retirement savings to continue supporting their children.

The report also compared sentiment across parents who benefit from financial advice and those who don’t. Those receiving ongoing financial advice are twice as likely to encourage their children to put a financial plan in place. This could help set children up for a more secure financial future.

The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.

Source:

¹ Public sector finances, UK - Office for National Statistics