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Higher UK borrowing risks derailing BoE rate cut path
Societe Generale says UK fiscal headroom for the Autumn Budget could fall by as much as £11.5 billion, depending on the growth and rates impact tied to the US-Iran conflict.
Societe Generale’s Sam Cartwright said a new UK Prime Minister has not changed the country’s constrained fiscal backdrop, which could limit delivery of ambitions across housebuilding, social care, investment, and defence.
In the bank’s view, the Autumn Budget is likely to concentrate on a defence uplift and day-to-day spending, with larger social care reforms delayed. Cartwright also flagged that fiscal flexibility could face constraints if headroom worsens.
Cartwright warned that higher capital borrowing to fund spending could challenge the Bank of England’s rate-cut trajectory. Societe Generale estimates that an additional 0.3% of GDP per year in borrowing for capital spending could put its BoE call at risk and lift gilt yields by just under 20 basis points.
The analysis also ties potential changes in fiscal headroom to developments around the US-Iran conflict. Societe Generale said fiscal headroom at the Autumn Budget could be £11.5 billion lower than projected in March if the conflict continues weighing on growth and pushing up interest rates, while an improvement could reduce the deterioration to as little as £5 billion, and worsening conditions could raise the impact to £23 billion to £43 billion.