BOE: BUDGET LIKELY TO BOOST DEMAND BY 0.1% IN 2026-27, DRAG BY A LITTLE OVER 0.1% BY 2029-30

The Bank of England has assessed that the UK government's budget is likely to add roughly 0.1% to aggregate demand in 2026-27, before fiscal tightening reverses that effect and subtracts a little over 0.1% by 2029-30. The transmission channel runs through the fiscal impulse to the output gap, which feeds into the Bank's inflation outlook and therefore into the path of Bank Rate. A near-term demand boost of this scale is marginal, so the more relevant read-through is that the net fiscal stance is close to neutral over the forecast horizon, limiting the case for it to be a major driver of rate expectations on its own. Gilts and sterling are the assets most directly exposed, since markets will reprice term premia and rate expectations against any shift in the Bank's view of inflationary pressure from fiscal policy. The next catalyst to watch is the Bank's upcoming Monetary Policy Report, where the staff's demand and inflation projections will show how these fiscal estimates are incorporated into the policy outlook.

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