Britain’s pound and government borrowing costs fell on Tuesday after Chancellor Rachel Reeves reaffirmed her commitment to the government’s fiscal rules in her upcoming November budget,
just days before the Bank of England delivers its next interest rate decision.
In a rare pre-budget address, Reeves warned that her second annual budget would involve “hard choices” to protect public services while reducing the UK’s debt burden. She signalled that broad tax increases may be necessary to avoid a return to the austerity measures of the previous decade.
Sterling slipped 0.5% to $1.3072, down from around $1.311 before she spoke, extending a weak run that saw the currency deliver its poorest monthly performance against the dollar since July. The euro rose 0.3% to 87.97 pence, adding to gains that last week pushed it to a two-and-a-half-year high versus the pound.
“Reeves is justifying tough decisions to come,” said Kit Juckes, head of currency strategy at Societe Generale. “The fact that this is happening at all means manifesto pledges will not be followed to the letter. We’re going to have higher taxes.”
Reeves outlined the challenging economic climate facing policymakers, citing elevated debt, weak productivity and persistently high inflation. Markets, however, reacted only modestly, with analysts noting that expectations for higher taxes on 26 November were already largely priced in.
Benchmark 10-year gilt yields fell as much as 5.9 basis points to 4.379% before settling around 4.42%, still down nearly 2 bps on the day and weighing on sterling. The move follows a near 30-bp drop in October, the biggest monthly decline since late 2023. London’s FTSE 100 remained lower, tracking broader European losses.
James Rossiter, senior global strategist at TD Securities, said Reeves’ speech—delivered ahead of the Bank of England’s meeting on Thursday—offered policymakers clearer guidance on the government’s fiscal direction. “We think the BoE will cut rates on Thursday,” he said.
Money markets currently assign less than a 40% chance of a quarter-point cut, though expectations for easing have increased in recent weeks amid softer inflation signals and rising anticipation of further fiscal tightening in Reeves’ budget.