UK autumn budget preview: Can Healey calm markets and change BOE rate hike bets?

<p class="text-align-justify" style="text-align: justify;">The UK autumn budget is coming up on 28 October, just a week before the BOE's next monetary policy decision . And with <a href="https://investinglive.com/news/uk-september-cpi-inflation-rises-to-3-5-reinforces-boe-november-rate-hike-expectations/" rel="follow">inflation concerns still hanging over the economy</a>, the government's fiscal plans could have a say in how interest rate expectations develop over the coming months.</p><p class="text-align-justify" style="text-align: justify;">For now, traders are pricing in roughly 99% odds of a 25 bps rate hike at the November meeting next week. So unless something really unexpected happens, that decision looks pretty much settled. As for December though, that is another story. Traders are currently pricing in around 47% odds of another rate hike before the year is out. That's essentially a coin toss and the autumn budget could be one to help tip expectations one way or the other.</p><p class="text-align-justify" style="text-align: justify;">So, what should traders be looking out for?</p><p class="text-align-justify" style="text-align: justify;">For starters, the general expectation is for a fairly cautious budget - one with modest tax increases and targeted support for households rather than any major spending commitments.</p><p class="text-align-justify" style="text-align: justify;">The backdrop is one where the government's fiscal headroom is looking rather uncomfortable. According to EY, that buffer against the government's fiscal rules has shrunk from £23.6 billion in March to an estimated £11.3 billion. That is largely because of higher borrowing costs and the economic fallout from the Iran conflict.</p><p class="text-align-justify" style="text-align: justify;">The <a href="https://www.reuters.com/world/uk/uks-healey-should-rebuild-fiscal-headroom-about-15-16-billion-reuters-poll-shows-2026-10-15/" rel="follow">latest Reuters survey</a> suggests that Healey should try and rebuild that buffer to around £15-16 billion to reassure bond investors. So, that at least gives us some useful benchmark for judging the budget.</p><p class="text-align-justify" style="text-align: justify;">On taxes, Healey is possibly going to lean on an increase in the levy on bank profits as the main expected revenue-raising measure. There has also been speculation about extending the mansion tax to properties valued above £1.5 million, down from £2 million currently.</p><p class="text-align-justify" style="text-align: justify;">Meanwhile, targeted energy subsidies for lower-income households, relief on electricity bills and a possible extension of the fuel-duty cut are among the measures in focus. The question now is how much relief Healey can offer without adding to borrowing. After all, markets are already expecting a relatively restrained budget, so any larger-than-expected spending commitments could quickly raise concerns about how they will be funded.</p><p class="text-align-justify" style="text-align: justify;">Now, any measures that directly reduce household energy bills or fuel costs could also help ease near-term inflation pressures, thus potentially taking some pressure off the BOE. However, cash subsidies might simply end up bolstering household spending instead. So, the details and how the government intends to fund them will matter.</p><p class="text-align-justify" style="text-align: justify;">As for spending, Healey is expected to hold back on bigger commitments involving housebuilding, defence and public services, with many decisions potentially pushed into 2027. As such, that should offer some reassurance to gilt investors - provided that the government's borrowing forecasts also hold up.</p><p class="text-align-justify" style="text-align: justify;">In that regard, the OBR's updated forecasts on inflation, growth, and overall borrowing will also be heavily scrutinised as those projections will help markets judge whether the fiscal