Markets flinched, then exhaled: Reeves’ Autumn Budget steadied nerves but left long-term doubts

Investors and businesses tend to brace for volatility as reforms can make or break market confidence.

This year’s Budget was no different. In fact, markets, investors and consumers were on a knife edge after some pitch-rolling from the Chancellor a couple of weeks ago signalled that bad news was inbound.

Domestically, markets expected fireworks; ahead of the budget implied volatility moved from 2% at the start of the week to 12% ahead of the announcement. It’s unsurprising given anticipated changes in tax and financial policy.

The good news: bar a brief period of volatility and a sharp fall of the pound when the Budget details were mistakenly leaked by the Office for Budget Responsibility, on the whole, markets breathed a sigh of relief.

Forty minutes after the leak when Chancellor Reeves stood up in the House of Commons, markets quickly recovered and the pound settled to slightly higher than it had been at the start of the day.

Reeves delivered a fiscally responsible Budget, which is exactly what gilt and currency markets wanted to see. She has avoided a Truss-like situation, which resulted in a significant sell-off in UK gilts, rocking the economy for several weeks following.

While her policies may not be unanimously popular in the UK, internationally investors saw the Budget and the £22bn of headroom created positively - the evidence of which can be seen through the rally in UK gilts.

The Budget is good for the pound in the short term, but in the long term, there is far less certainty. If the mooted ‘fiscal headroom’ fails to materialise, downward pressure on the pound may increase. Finance professionals should brace for long term market implications that may arise from that eventuality.

Ultimately, today’s policies will see many facing the reality of higher tax brackets in the coming year, which may lead to a decrease in consumer spending. Fiscal tightening could give the Bank of England flexibility to cut rates more aggressively, with the chance of a cut at their meeting on the 18th of December currently sitting at 87%.

This could weigh on the pound if the Bank of England looks to cut rates throughout 2026. Investors will yield lower returns by investing in UK debt, which will have wider implications for investor confidence.

While today’s Budget didn’t rock markets as much as was anticipated, businesses always need to be prepared to adapt their strategies quickly at these significant political moments.

Some level of market volatility around political reform is expected. A false market alarm was set off this time, but this doesn’t mean the next one will be quite so harmless. The smart firms will be tightening their scenario planning and thinking ahead about what fiscal tightening means for their operations long term.

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Vivek Savani is the UK Country Manager, iBanFirst

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