UK Consumer Confidence Faces Dual Pressure from Slowing Rate Cuts and Rising Tax Expectations

The Bank of England (BoE) has paused interest rate cuts this month,while potential tax increases and welfare cuts in the upcoming autumn budget have also dampened consumer confidence in the UK.Analysts point out that the UK government faces the dual challenge of maintaining economic growth and addressing long-term fiscal burdens,making the autumn budget announcement on October 30th highly anticipated.

The pace of interest rate cuts may be slower than in Europe and the US

The BoE announced this month that it will keep interest rates unchanged and has decided to reduce its holdings of UK government bonds by another £100 billion over the next year.

UK inflation levels have been controlled,with the UK Consumer Price Index (CPI) rising by 2.2% year-on-year in August,matching the increase in July.In May and June,the UK CPI rose by 2% year-on-year.However,rapid wage growth and high service sector inflation still make the BoE cautious about cutting interest rates.

Pepperstone's senior strategist,Michael Brown,stated that due to relatively stubborn underlying price pressure,the BoE has shown a relatively patient attitude towards the normalization of monetary policy.

However,BoE Governor Andrew Bailey expressed an optimistic attitude towards further interest rate cuts.Bailey also stated that interest rate cuts need to be gradual and should not be made too quickly or too much.

In an interview on the 24th,Bailey said that the downward path of inflation is very encouraging,and interest rates will gradually decrease.When asked about the level at which interest rates will stabilize,Bailey said that he expects interest rates not to return to the historical low near zero four years ago,and the most likely outcome will be achieving a "neutral interest rate."

In August,the BoE reduced interest rates from a 16-year high of 5.25% to 5%.Analysts predict that the pace of UK interest rate cuts may be slower than in the Eurozone and the United States.

The Federal Reserve (Fed) cut interest rates by 50 basis points last week,and the futures market expects the Fed to cut interest rates by at least another 75 basis points before the end of the year,bringing US interest rates down to around 4.00%.Fed Chairman Jerome Powell said that inflationary pressures are easing,and the labor market needs support.

Economists surveyed by Reuters predict that the BoE will cut interest rates to 4.75% at its next meeting in November.After the BoE decided to keep interest rates unchanged,the market's bets on the possibility of a rate cut in November have decreased,with the likelihood dropping to 66%.The market expects that by December,UK interest rates will be close to 4.50%.The slower-than-expected decline in UK interest rates has bolstered the strength of the British pound.The pound has risen by more than 5% this year,while the euro has only increased by about 1%.

Autumn Budget Becomes the Focus

Data from the UK Office for National Statistics shows that by the end of August this year,the net debt of the UK's public sector has reached 100% of GDP,a level not seen since the 1960s and deemed unsustainable.The UK government faces the dual challenge of maintaining economic growth and addressing long-term fiscal burdens.

UK Chancellor of the Exchequer Rachel Reeves stated at the Labour Party's annual conference in Liverpool on the 23rd that,in the face of swelling national debt,it is necessary to establish an "iron rule" for the economy,which implies potential measures such as tax increases and welfare cuts.

Analysts say that Reeves reiterated the Labour Party's pre-election commitment that workers would not face wage-related tax increases,but other taxes could still rise.

UK Prime Minister Keir Starmer,elected in July,and Reeves have indicated that the UK is facing the worst economic conditions since World War II and have expressed their intention to rebuild the economy.Some business figures have complained that such pessimistic statements could damage business confidence and economic growth.

Reeves announced the cancellation of the winter heating allowance for 10 million pensioners and warned that the increase in taxes could exceed her pre-election forecasts.

Data shows that cutting the aforementioned allowance would only save about £1.5 billion,far from enough to cover the £22 billion fiscal deficit that Reeves had previously warned about.

Reeves also stated on the 23rd that next month's budget will pave the way for business investment,enabling the UK to achieve "sustainable growth." Reeves claimed that there would be no return to the austerity fiscal policies of the Conservative Party era and that there would be proactive actions in areas where they are needed.

Reeves indicated that the Treasury,in conjunction with the Secretary of State for Business,Energy and Industrial Strategy,will formulate new policies next month aimed at promoting long-term growth in UK manufacturing and services,unlocking investment and creating jobs,breaking regional growth disparities,and achieving the net-zero emissions target by 2030.KPMG has indicated that the upcoming Autumn Budget will be a very stern test for the UK Chancellor of the Exchequer,who will need to strike a balance between limited fiscal space and expanding expenditures,potentially even necessitating amendments to fiscal rules.

Tax Hike Expectations Undermine Consumer Confidence

Inflation soared in 2022 and continued to erode consumers' purchasing power over the following two years.Currently,the slowdown in price increases,acceleration in wage growth,and central bank interest rate cuts are all contributing to the partial recovery of the British public's reduced living standards.

Official data reveals that UK retail sales increased by 1.0% in August compared to July,outperforming market expectations.Grant Fitzner,the Chief Economist at the Office for National Statistics,stated that although retail sales have recently increased,overall sales are still slightly below pre-pandemic levels.

Recent reports from British retailers show that consumers' discretionary spending remains under pressure.Clothing retailer Primark reported a decline in its latest quarter UK sales.British retail giant Kingfisher indicated weak consumer demand for kitchen and bathroom products.British clothing brand Next stated that sales for the first six weeks of the second half of the year were better than expected,but the market for large household items remains challenging.

Some analysts believe that if the pace of UK interest rate cuts is slower than anticipated,it will not be conducive to boosting consumer spending.Additionally,a recent survey revealed that consumer confidence plummeted significantly in September,influenced by Starmer's pessimistic remarks on the UK's economic situation and the possibility of tax increases in the Autumn Budget.The GfK Consumer Confidence Index fell from -13 in August to -20 in September,marking a six-month low.All five confidence indicators in the survey declined in September,with expectations for the economy over the next year dropping by 12 percentage points.