What the UK Budget Means for Its Bond and Stock Markets

Goldman Sachs Research sees scope for UK government bonds and stocks to rally following UK Chancellor Rachel Reeves’s autumn budget announcement last week. The budget blueprint may spur investors to shift their focus from the government’s fiscal situation to the country’s economic outlook. 

What does the UK budget mean for BoE rate cuts in 2026? 

In terms of economic growth and inflation, the effects of the budget appear to be relatively modest, according to Jari Stehn, chief European economist in Goldman Sachs Research.  

The Office for Budget Responsibility (OBR) has estimated that the new measures announced in the budget will increase GDP by 0.1 percentage point and reduce headline inflation by 0.4 percentage point in the 2026 fiscal year. 

Our economists expect the UK economy to expand 1.1% next year and inflation to fall to 3.4% in 2025 and to 2.3% in 2026.

“We think the implications for the Bank of England are limited,” Stehn adds. Goldman Sachs Research forecasts that the Bank of England (BoE) will cut rates in December, then cut three more times next year, bringing its policy rate down to 3% by the summer of 2026. 

The government’s budget measures are estimated to give the government £21.7 billion ($28.7 billion) of headroom against its fiscal rules. (Our economists had previously expected around £15 billion of headroom.) Fiscal headroom is the cushion between the government's spending plans and its own long-term budget commitments. 

What does the UK’s budget mean for gilt yields? 

Yields for government bonds fluctuated following the announcement, which likely reflected a reassessment of risk premia—the discounts that investors demand in return for the risk of holding a particular asset. This stemmed from budget uncertainty, rather than a revised macroeconomic outlook, according to George Cole, head of European rates strategy in Goldman Sachs Research. 

The volatility gave way to broader relief for gilts as the market digested the details of the budget.

The new budget measures, coupled with changes to the OBR’s forecasts for wage growth, price growth, and productivity growth, leave net government borrowing above Goldman Sachs Research’s forecast. 

Borrowing numbers were revised up by £21 billion in the current fiscal year and by an average of £9 billion over the subsequent four fiscal years. Goldman Sachs Research was expecting an upwards revision of just £13 billion this year and a much smaller revision on average over the subsequent years. 

At the same time, gilt markets have also reacted positively to the government’s plan to issue more shorter-dated bonds in the coming years. “We had expected them to keep the issuance buckets relatively unchanged in the share, but in fact what we saw was that the unallocated gilts—the gilts where they hadn’t quite made up their minds about which bucket to put them in—they skewed them towards the short and medium buckets,” Cole explains. Yields for 30-year bonds declined following the announcement. 

What does the budget mean for UK stocks? 

Markets had already priced in a gloomy outlook for British stocks before the budget was announced. 

Sharon Bell, senior European equity strategist in Goldman Sachs Research, points out that UK domestic stocks have underperformed the FTSE 100—largely comprised of multinational companies with more operations outside the UK—by 11% since July. 

Meanwhile, UK mid-caps are giving investors 100 basis points more dividend yield than the FTSE 100, making them much cheaper than their larger, more international peers. 

“That is a historically incredibly high gap, and I think that speaks to the universal gloom that there was going into this UK budget,” Bell says. 

That starting point, combined with a decline in UK interest rates since the budget, have contributed to a rally in UK stocks since the budget announcement, she says. 

Additionally, UK-facing stocks and sectors such as real estate and utilities are particularly well positioned to benefit from lower rates. “If we start seeing that risk premium in gilts moderate a bit, then those areas can outperform,” Bell says. 

The Chancellor also reduced the amount of money that can be invested tax-free each year in an Individual Savings Account (ISA) for cash (for people under 65 years of age). The tax-free limit for ISAs invested in stocks and shares remains unchanged at £20,000. 

“I do see this as helpful. I’d argue that UK households are over-invested in cash and under-invested in higher returning risk assets like equity,” Bell says. But she adds that for a sustained turn in equity flows, a reversal in consumer sentiment is more important than any tax incentive. 

At the same time, the Chancellor raised the tax rate on savings income, dividends, and property income while placing a cap on salary sacrifice pension contributions. The measures are “unhelpful for investment in equity at the margin,” Bell notes. “That said, even with these caveats the reaction from asset managers has been positive for the focus on UK investment.” 

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