RBNZ Cuts, Aussie Inflation Rises as Markets Brace for UK Budget
Earlier this morning, the Reserve Bank of New Zealand delivered a quarter-point cut to the Official Cash Rate, bringing it to 2.25%, supported by a 5–1 vote. While the move eases policy to support the economy, the tone of the minutes was far from dovish. Annual inflation currently sits at 3%, the top of the central bank’s target range, and core and non-tradables inflation remain elevated. Policymakers warned that inflation could remain sticky if demand rebounds faster than expected or if businesses rebuild profit margins. The minutes revealed an internal debate about whether to pause rather than cut, acknowledging that prior easing is still filtering through the economy. Ultimately, the Committee opted for a cautious cut, signaling that while rates may drift lower, the pace will be careful and future moves will depend on incoming data. Lower interest rates are already supporting household spending, and signs of a stabilizing labour market provide some reassurance that the easing cycle will not be overly aggressive. For the New Zealand dollar, the combination of a hawkish cut and soft forward guidance suggests mild near-term downside, although stabilizing labour conditions could limit further losses.
In Australia, the latest Consumer Price Index for October rose to 3.8% in the past twelve months, slightly above September’s 3.6%. Housing costs, food, and recreation continue to drive underlying price pressures, while the trimmed mean inflation increased to 3.3%, showing that core inflation remains elevated. Over the past year, inflation had been gradually easing, but this latest uptick indicates that the path back toward the Reserve Bank of Australia’s target band remains uneven. For the Australian dollar, the hotter-than-expected print provides some support, as it reduces expectations for near-term rate cuts and reinforces the RBA’s cautious approach. The data suggests that the central bank is likely to hold rates for longer rather than easing aggressively, waiting for a more sustained decline in inflation before considering cuts.
With these developments setting the stage in the Asia-Pacific region, attention now turns to the UK, where Chancellor Reeves is poised to unveil the Autumn Budget. The government faces an estimated £20 billion fiscal shortfall and must balance raising revenue with avoiding measures that could slow growth or unsettle markets. The lead-up to the Budget has been unusual, with numerous tax ideas floated, flagged, leaked, and then retracted, creating confusion among businesses, investors, and the public. This “kite flying” of policy proposals is designed to test reactions before committing, but it has made it harder to predict what the final plans will look like.
Analysts now expect a mix of measures. Some targeted tax increases are likely, including freezing income tax thresholds, adjusting council taxes, and revising pension schemes. Other areas that could be tapped include high-value property taxes, a gambling levy, and potentially new levies on electric vehicles. At the same time, the government may offer relief measures to reduce the cost of living, such as scrapping the two-child welfare cap, cutting VAT on energy bills, and freezing rail fares. Economists warn that the challenge will be to balance these actions carefully; too much in tax increases could slow growth, while too little may fail to close the fiscal gap, raising borrowing costs and putting pressure on the pound.
The Office for Budget Responsibility forecasts, released alongside the Budget, are another key focus. The OBR may revise down growth and productivity forecasts, reflecting weaker economic conditions, lower expected output, and lingering uncertainty in key sectors. These projections will influence how markets view the UK’s fiscal sustainability and could affect bond yields, investor confidence, and the pound. The Budget will also indicate whether the government can expand its fiscal headroom—the buffer that allows spending or tax cuts without breaking fiscal rules—from around £10 billion to £15 billion, which will be crucial for funding future priorities without triggering financial stress.
Overall, the Autumn Budget will be closely watched for its ability to thread the needle between revenue generation, supporting growth, and maintaining market confidence. For investors, businesses, and households, the key questions will be how much the government leans on taxes versus spending restraint, whether the relief measures are sufficient to ease the cost-of-living pressures, and how the OBR’s outlook affects perceptions of long-term fiscal stability. Markets are likely to react sharply, with the pound especially sensitive to any surprise in either direction, making this one of the most important events in the UK economic calendar for 2025.
Analysis by Coach Angel
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