Bank of England Could Cut Rates More Than Expected If Reeves Raises Taxes, Say Economists
The Bank of England may deliver deeper interest rate cuts than currently forecast if Chancellor Rachel Reeves implements tax hikes in the autumn, according to economists.
Reeves is under pressure to plug a growing fiscal gap, with tax rises anticipated in the next Budget following U-turns on welfare reform and winter fuel payments. Economists at Deutsche Bank warn the Chancellor could face a £32bn shortfall in the public finances later this year.
On Wednesday, government borrowing costs spiked after Reeves appeared tearful in the House of Commons, sparking speculation over her future and raising concerns about a potential shift away from strict borrowing discipline.
However, bond markets stabilised after Prime Minister Sir Keir Starmer publicly reaffirmed his support for Reeves. In her first public appearance since the Commons exchange, Reeves reiterated her commitment to fiscal rules, aiming to reassure investors and maintain market confidence.
Chancellor Rachel Reeves has defended her commitment to the Government’s borrowing and spending rules, stating that this fiscal discipline “has meant that we can boost investment in public services.”
However, economists warn that sticking to those rules could leave Reeves with little choice but to raise taxes in the autumn. The recent U-turn on welfare reforms suggests that cutting spending may be politically unfeasible, leaving tax increases as the likely route to plug budget gaps.
Kallum Pickering, senior economist at Peel Hunt, said that if Reeves proceeds with further tax hikes, the Bank of England could respond with deeper interest rate cuts than currently projected.
“Tax hikes would depress demand and inflation,” Pickering noted. “Assuming inflation is roughly back to target next year, the Bank of England should be able to offset any demand-slowing tax increases with easier monetary policy.”
Money markets currently price in three rate cuts by April 2025, which would bring the Bank Rate down from 4.25% to 3.5%. But Pickering suggests there’s room to go even lower, especially as inflationary pressures from energy prices subside.
“This story should become clearer over time,” he added, “especially if the Government is indeed forced to significantly raise taxes.”
