Leading Indicators | Headroom or Headache? Reading between the lines of the pre-budget mood

All eyes on the bond market

With the budget just a day away, attention is turning to the policy choices ahead as bond markets remain alert to fiscal signals. Markets continue to shape decision-making, and governments remain highly sensitive to the views of bond investors, who typically favour tighter fiscal conditions through higher revenues and lower spending. Taken too far, this risks weighing on growth, but ignoring it could trigger a negative market reaction and higher borrowing costs. The UK government therefore faces a delicate task in balancing growth with fiscal credibility.

Borrowing into the budget

The UK government borrowed £17.4bn in October, slightly above expectations and the third-highest for the month on record. This contributed to an overshoot in borrowing over the first seven months of the 2025–26 fiscal year, with cumulative borrowing now at £116.8bn, around £9.9bn above the OBR’s March projection. This will be an important factor as the Chancellor finalises decisions ahead of the Budget.

On another note, UK Inflation turns lower ahead of Reeves’ budget

UK inflation fell for the first since May to 3.6% in October, driven by a sharp slowdown in utility price inflation from 9.4% to 2.2%, and helped by the new Ofgem price cap which limited bill rises to 1.9% versus 9.0% last year. Alongside rising unemployment at 5.0%, softer wage growth, weaker third quarter GDP and a potentially tax-raising Budget, price pressures are continuing to ease, strengthening the case for the Bank of England to cut rates from 4.00% to 3.75% at its 18th December meeting -providing an early festive gift.