Hopes of back-to-back interest rate cuts by the Bank of England over the next two months have been dampened by the UK government’s recent budget, economists have warned.

These rate cuts typically reduce borrowing costs for consumers and businesses over time.

The likelihood of back-to-back cuts fell as the market digested last week’s statement, with the probability of a cut in November currently at 90% but another in December at 65.2%, according to Refinitiv data. This is down sharply from last week.

According to Pantheon Macroeconomics, the budget, which expanded fiscal spending by 1.2 percent of GDP for next year, is expected to reduce slack in the economy, which could otherwise help lower inflation.

“The positive flow of data over the past month, which put back-to-back interest rate cuts on the Monetary Policy Committee (MPC) table in November and December, has been wiped out by the Budget,” Pantheon chief economist Robert Wood said.

markets reacted with hostility to last week’s tax returnwith sterling falling sharply and gilt yields – the rate of interest paid by the government – rising.

The Office for Budget Responsibility (OBR) estimates that the Budget will add 0.5 percentage points to the Consumer Price Index (CPI) in 2025.

In early October, Bank of England Governor Andrew Bailey suggested the MPC could take a more “aggressive” approach to rate cuts if inflation data continued to improve. However, Pantheon economists warned that the MPC was likely to proceed more cautiously now, guarding against the inflationary impact of fiscal easing.

Pantheon said it now expects the MPC to deliver another rate cut this year, potentially at this week’s meeting, followed by a 25 basis point cut each quarter through 2025, one less than expected previous.

“Otherwise, we expect further reduction this year at this week’s meeting,” adds Pantheon. “This is one less than we expected at the time of our last forecast review. The market is taking a similar view, with prices now reflecting 25bp less overall easing by March than before the budget”.

Market expectations have also shifted, now reflecting 25 basis points less total easing by March than before the budget.

The picture is different in the United States, where economists still expect two rate cuts before the end of the year.

Like the MPC, the US Federal Reserve will meet on Thursday, a day later than usual because of Tuesday’s electionsand inflation still cooling, the Fed is expected to cut interest rates for the second time this year.

Fed policymakers, led by Chairman Jerome Powell, are expected to cut the benchmark rate by a quarter of a point to about 4.6 percent, after a half-point cut in September. Economists forecast another cut of a quarter of a point in December, with further cuts possible next year.