BOE: GOVERNMENT BUDGET LIKELY TO CUT INFLATION BY 0.25 PERCENTAGE POINTS BY Q2 2027, THEN RAISE BY THE SAME AMOUNT A YEAR LATER AS THE EFFECT UNWINDS.

The Bank of England has assessed that the government's budget is likely to reduce inflation by 0.25 percentage points by the second quarter of 2027, with the effect reversing a year later as the boost fades and inflation rises by the same magnitude. The mechanism runs through fiscal policy's direct influence on aggregate demand and administered prices: a temporary tightening or measures affecting consumer prices shift the inflation path without altering the underlying trend, which matters for how policymakers and markets interpret the timing of disinflation. Sterling-denominated short-dated gilts and money-market rate expectations are most exposed, since traders price Bank Rate paths around the timing and persistence of such effects rather than the headline level alone. Sterling and the front end of the gilt curve are where repricing would be most visible if the projected profile shifts. The next catalyst to watch is the Bank of England's upcoming Monetary Policy Report and its inflation projection tables, which will show whether the staff's near-term disinflation estimate is incorporated into the policy-rate outlook.

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