(Bloomberg) — The Bank of England could snuff out hopes of a move to faster rate cuts this week after the budget reignited inflation concerns and triggered a sell-off in U.K. bonds that evoked memories of the stock market crash in 2022.

Economists and traders expect the Monetary Policy Committee to go ahead with only the second interest rate cut this year on Thursday, lowering the benchmark rate by a quarter of a point to 4.75%.

However, investors will focus on whether Governor Andrew Bailey and his colleagues deliver more cautious messages about future cuts after Chancellor Rachel Reeves announced one of the biggest tax cuts in decades.

The nine-member MPC meeting is now a high-stakes event for UK assets after markets were rocked by plans to boost spending and borrowing to boost investment and public services. A dramatic reassessment of rate expectations left the BOE lagging behind the easing cycles of the Federal Reserve and the European Central Bank next year.

“The market will be much more focused on whether there are signs that December is clearly in play for easing or not,” said George Buckley, Nomura’s chief UK economist. “Higher growth and inflation should lead to a less accommodating BOE.”

Ahead of the budget, below-target inflation and, crucially, a slowdown in service prices, raised the prospect of the BOE moving to successive rate cuts in November and December. Bailey fueled speculation by saying the central bank could be “a little more aggressive” if good inflation news continued.

But those hopes evaporated after Reeves shocked markets with his tax plans, which increased spending by 70 billion pounds ($90.5 billion) a year on average. Tax increases cover a little more than half of the growth, with the rest financed by additional borrowing – a recipe for inflation. While a BOE cut on November 7 is still largely priced in, investors put the chance of another cut in December below 20%.

Reeves tried to reassure voters on Sunday that he would not repeat the huge package of tax increases that were the largest in 30 years. She said she would “never have to do this again” and admitted she was wrong to tell voters before the July 4 election that she would not announce any more tax increases.

“I was wrong on June 11,” she told Sky News, explaining that she had underestimated the size of the UK’s budget deficit. “Just under a month after I said those words, I was taken into a room by senior Treasury officials and they discovered the huge black hole in the public finances.”

Focusing now on how Threadneedle Street officials will react to the budget, Ales Koutny, head of international rates at Vanguard Asset Management, said even a move by the BOE next week was now in doubt, putting the chances of a cut at 50. -50.

“A lot of the bad news may now be in the price,” said Mark Dowding, chief investment officer at RBC BlueBay Asset Management. “However, we are struggling to build much of an upbeat narrative and also maintain a relatively weak assessment of the pound’s valuation.”

The budget sent the pound and bonds tumbling. The yield on the benchmark 10-year note ended the week at 4.45% – 21 basis points higher than five days earlier. It was the biggest weekly increase since January. Two-year yields rose about 27 basis points per week. The run quickly spread to stocks and sterling, with the British currency posting its fifth straight week of decline against the dollar, its longest losing streak of 2018.

Many have downplayed the parallels with the market turmoil triggered by former prime minister Liz Truss’s £45bn unfunded package of tax cuts in 2022. However, the simple comparison is not welcome for Prime Minister Keir Starmer’s new Labor government, who came to power in July with a pledge. to end the financial and political turmoil that has marked the last few years under the Tories.

The fact that the rise in gold yields last week was most pronounced on the short side of the curve contrasted with the Truss episode, where long bonds fell. It suggests investors are concerned about how the budget affects the outlook for BOE rates.

“Ultimately, the budget will be too big for the BOE to ignore,” said Modupe Adegbembo, an economist at Jefferies in London. The size of the tax giveaway “increases the risk that the BOE will skip cutting the rate cut in December and undermines Governor Bailey’s hopes that the BOE will become more activist with rate cuts.”

The timing of Thursday’s MPC meeting presents a major communications challenge for Bailey, coming a week after the Budget and just days after the US election.

The BOE is expected to provide its initial assessment of how the budget affects its projections. However, it is unclear whether the measures came soon enough to be incorporated into the BOE’s new growth and inflation forecasts that will accompany the rate decision.

The Office for Budget Responsibility’s verdict suggested that budget policies added 0.4 percentage points to inflation at the peak impact in 2026. This is expected to affect living standards, which are expected to improve only slightly from the last parliamentary term , when they grew with the weakest in history.

“All the market movements that have happened recently will not have gone into the MPR, which is also a bit of a problem in terms of how you position the messages,” said Andrew Goodwin, chief economist at Oxford Economics . “It’s probably the worst moment he could have, to be honest. There are so many moving parts.”

–With help from James Hirai.

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