| Expectations for US interest rate cuts have increased, and rates are falling across much of the developed world. Yet inflation remains stubborn, and higher borrowing costs are still weighing on the most indebted sectors. The UK Autumn Budget is looming, with tax increases likely and several options on the Chancellor’s shortlist. Despite the best efforts of politicians, most markets have performed well this year, but now is not the time for complacency. August is the month for the financial world’s “Super Bowl” (some sort of major American sporting event, for those not in the know); the Jackson Hole Economic Symposium. It is where the great and the good (central bankers, politicians, and an army of press) gather to discuss all things financial. It is also where the Chair of the US Federal Reserve, currently Jerome Powell, offers insight into the future direction of interest rates. This year’s meeting was especially significant, with Powell under increasing fire from President Trump, who has characteristically and not-so-subtly threatened to sack him for not cutting interest rates quickly enough. Although inflation has not yet been fully conquered, Powell’s tone suggested concern for the economy - particularly regarding the labour market and the fallout from Trump’s tariff extravaganza (my word, not his). This sparked a sharp rise in expectations that interest rates will be cut soon, always a heady potion for stock markets which rallied in glee; lower rates are widely seen as supportive of growth and company profits. Whilst lower interest rates are on the cards across much of the developed world (except Japan, who didn’t get the memo and is raising them), it is important to note that high interest rates take time to feed through into the economy; for example via mortgage costs. There are also signs that parts of the financial system such as debt obsessed private equity firms (who love to buy companies using lots of expensive borrowed money), are feeling the pinch. In the UK, attention now turns to another Autumn Budget, expected to be as closely watched as last year’s given an estimated £40bn fiscal gap that needs plugging. A wide range of tax options are under review, including a possible wealth tax, levies on banks, and changes to inheritance tax thresholds – more on this below. Labour’s manifesto pledge not to increase taxes on “working people” leaves the Chancellor with limited room for manoeuvre. Whatever is announced, it’s important to avoid knee-jerk reactions; policies take time to be enacted and may change before implementation. As ever, seeking professional advice from your financial adviser remains the best course of action.Bottom LineWhilst 2025 has so far been a year where politicians seemingly cannot resist meddling, and the geopolitical backdrop remains fraught, most markets are, perhaps surprisingly, in positive territory. That isn’t to say we should all head to the pub and celebrate, investing requires patience and a readiness to withstand periods of turbulence, especially when many assets already look richly valued. |
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| What does a possible UK windfall tax on banks mean for savers and investors?An influential think tank (the IPPR) recently urged Rachel Reeves to impose a levy on bank profits made from depositing taxpayers’ money at the Bank of England. Banks have also been criticised for not passing on the high savings rates they receive on deposits. The IPPR estimates the levy would raise c.£32 billion over the current five-year parliamentary term and create £3.6 billion in extra headroom for day-to-day spending. Banks disagree, arguing the tax contradicts Reeves' commitment to keep the UK’s financial sector globally competitive. On the news, shares of NatWest and Lloyds fell around 5% and 3% respectively. For savers, the impact remains unclear, some argue the tax would further discourage banks from passing on these rates to depositors, as they look to maintain current profit margins. Others say banks could be incentivised to offer better rates to depositors to mitigate further political pressure. For investors the outcome is clearer; the tax would shrink profits, and investors could see reduced dividends and buybacks. There are also concerns that foreign investors may shift funds to countrieswith more predictable tax regimes, weakening the UK financial sector’s global position. What could we expect in the Autumn budget?The UK Government’s Autumn Budget, set for 26th November this year, is set against the ominous backdrop of a projected £40 billion fiscal shortfall. With commitments to avoid increases in income tax, VAT, and National Insurance, attention is turning to wealth, property, and behavioural taxes. Speculation centres around reforms to capital gains and inheritance tax, potential new property levies like a mansion tax, the application of National Insurance to rental income, and extended freezes on tax thresholds. Inheritance tax is under particular scrutiny, with proposals including a reduction in the £325,000 nil-rate band, caps on lifetime gifting exemptions, tighter rules on the seven-year gift relief, and restrictions on agricultural and business asset reliefs; measures that would gradually bring more estates into the tax net. Pension and ISA tax reliefs could also face tighter limits. On the spending side, the government is expected to prioritise productivity through infrastructure investment and planning reform. The overall package is likely to be framed around “fairness” to hopefully soften public backlash, with politically sensitive areas such as fuel, gambling, and food duties also under review. What is the outlook for UK Inflation?UK inflation rose more than expected in July, with the Consumer Price Index (CPI) increasing to 3.8% in the year to July 2025, up from 3.6% in June. This is the highest rate since January 2024 when CPI was 4%. Transport costs were the primary driver of the increase, mainly due to a 30.2% month-on-month jump in airfares, a seasonal spike linked to school holidays. Food prices also rose, with notable increases in coffee, fresh orange juice, meat and chocolate. Services inflation increased to 5% from 4.7% in June. Services inflation measures service-related categories like education and hospitality. It has remained stubbornly high in the UK, consistently overshooting the Bank of England’s targets. The Bank of England expects CPI to peak at 4% in September, before gradually easing. At 3.8%, inflation is far from their 2% target, constraining the Bank of England’s ability to meaningfully lower rates. The 0.25% rate cut in August required the Monetary Policy Committee to hold an unprecedented second vote, reflecting divisions over how to balance slowing economic growth with stubborn inflation. Governor Andrew Bailey confirmed rates remain on a downward path but stressed that any future rate cuts will be slow and measured. |
