Budget delay hits rate cut outlook

Signs that borrowers will have to wait until Christmas for the next interest rate cut have underpinned a stronger run for the shares of Lloyds Banking Group (LSE:LLOY) and NatWest Group (LSE:NWG).

The Bank of England’s next policy decision is due on Thursday 18 September, with the City expecting no change in the wake of August’s narrow vote to cut the base rate to 4%.

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The following meeting on 5/6 November would represent the next leg of the Bank’s “gradual and careful” quarterly approach to loosening monetary policy, having lowered the rate five times since August 2024..

However, economists believe the later than usual timing of the Budget on 26 November and inflation’s elevated position near 4% will mean a delay to the week before Christmas or into 2026.

Current market pricing points to just two more rate cuts over the rest of the cycle, an outcome potentially beneficial to the margin outlook of Britain’s lenders.

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The shares of Lloyds Banking Group and NatWest fell sharply in early September due to fears the industry will be targeted for higher taxes in the Budget. However, the pair have since rallied by more than 3% amid the higher-for-longer rates speculation.

Deutsche Bank said this week that a December rate cut now looked more likely, having previously expected a move in November.

It said that waiting would allow the monetary policy committee (MPC) to more carefully judge where inflation could land in 2026, given the potential impact of Budget announcements on index-linked, administrative and dutiable items.

A longer wait will also allow the MPC to see up to four further GDP, labour market and inflation reports. In addition, they will have more clarity on the likely level of 2026 pay settlements.

Deutsche Bank thinks a November cut isn’t completely off the table, adding that the way the MPC frames its September decision will be key to determining appetite for quarterly rate cuts. At the last meeting, four members of the committee voted to skip August’s expected cut.

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UBS currently sees a pause on 18 September and acknowledges risks around the timing of the next downward move.

It said: “While we think that improving underlying services inflation should allow the BoE to continue with its gradual approach to easing, cuts might be delayed in the event of further upside surprises in inflation ahead of the November meeting.”

UBS points out that by the time of the November meeting, the MPC will only have September’s CPI figure to hand, which is likely to show an annual rate of 4%.

For 2026, the bank continues to expect three quarter-point rate cuts in February, April and July to 3%. That compares with current market pricing for a low point of 3.57%, which the bank said this week looks “much too pessimistic”.