Hopes of consecutive interest rate cuts by the Bank of England over the next two months have been dampened by the UK government’s recent budget, economists have warned.

These rate reductions generally reduce borrowing costs for consumers and businesses over time.

The likelihood of back-to-back cuts declined as the market digested last week’s statement, with the likelihood of a cut in November currently at 90%, but 65.2% for another in December, according to data from Refinitiv. This is down sharply since last week.

The budget, which increased fiscal spending by 1.2 percent of GDP for the coming year, is expected to reduce the slowdown in the economy, which could otherwise help reduce inflation, according to Pantheon Macronomics.

“Last month’s flow of positive data that put back-to-back rate cuts on the table for the Monetary Policy Committee (MPC) in November and December has been erased by the budget,” said Pantheon’s chief economist , Robert Wood.

Markets reacted with hostility to last week’s financial reportwith a sharp fall in the pound and a rise in yields on gilts – the interest rate paid by the government.

The Office for Budget Responsibility (OBR) forecasts that the budget will add 0.5 percentage points to the Consumer Price Index (CPI) in 2025.

Earlier in October, Bank of England Governor Andrew Bailey suggested the MPC could take a more “aggressive” approach to rate cuts if inflation data continued to improve. However, Pantheon economists warn that the MPC should now proceed more cautiously, wary of the inflationary impact of the budget’s fiscal easing.

Pantheon said it now expects the MPC to make another rate cut this year, potentially at this week’s meeting, followed by a 25 basis point cut each quarter in 2025, or a reduction less than expected.

“In total, we expect a further reduction this year, at this week’s meeting,” adds Pantheon. “This is one less than we expected at the time of our last forecast revision. The market shares a similar view, with prices now reflecting 25 basis points less easing by March than ‘before the budget.’

Market expectations have also changed, now reflecting 25 basis points less easing by March than before the budget.

The situation is different in the United States, where economists still expect two rate cuts before the end of the year.

Like the MPC, the US Federal Reserve will meet on Thursday, a day later than usual. due to Tuesday’s electionsand as inflation continues to slow, the Fed is expected to cut interest rates for the second time this year.

Fed policymakers, led by Chairman Jerome Powell, are expected to cut the benchmark rate by a quarter point, bringing it to around 4.6%, following a half-point cut in September. Economists predict another quarter-point cut in December, and more cuts could come next year.