The chances of an interest rate cut in December have almost doubled in the last week from about 37% to over 70%. If Rachel Reeves delivers on her promise to cut the cost of living in the Autumn Budget, then a December rate cut seems like a good bet. The 26 November announcements could also put additional rate cuts on the cards for next year, depending on the size of the government’s tax, spending and borrowing plans for 2026.

The reason for this shift is that we we had two new bits of information last week.

First, Rachel Reeves called a last-minute press conference on Tuesday morning to set the scene ahead of the Autumn Budget. Admittedly, you have to read between the lines to work out what she was trying to get across. But, a Chancellor giving a major speech so close to a budget is very unusual, so it’s worth paying attention to.

The key takeaways from the speech were that large tax rises are coming and that the government is focusing on bringing interest rates and the cost of living down.

From the Bank of England’s point of view, this is useful information. It suggests there won’t be a repeat of the policy-induced inflation surge we got in April: you can’t claim to be tackling the cost of living if you’re also pushing up inflation. What’s more, a big tax-raising Autumn Budget will suck demand out of the economy, helping to bring inflation down more quickly. This would open the door to more interest rate cuts.

Of course, that wasn’t enough to prompt the MPC to cut rates last week, which wasn’t a massive surprise. For the sake of a few weeks, it might as well wait and see what’s actually in the Chancellor’s speech on 26 November before it commits fully to changing policy.

This leads me to the second reason why the chances of a rate cut have surged this week. The vote split on the MPC was closer than expected. Four of the nine-member Committee voted to cut rates, despite the Autumn Budget being round the corner. (Most people had expected only three members to vote for a rate cut.) It makes getting a majority to vote for a rate cut in December that much easier.

What’s more, the Minutes of the meeting made it clear the MPC is moving towards more rate cuts. For example, the latest MPC Summary and Minutes said, “overall, the risks were now more balanced in regards to inflation”. This is a stark change from September’s Minutes when the Committee emphasised how “upside risks around medium-term inflationary pressures remain prominent…”.

So, if the Autumn Budget does bear down on the cost of living as the Chancellor suggested in her speech last Tuesday and there isn’t an unexpected surge in inflation in the next batch of data (published on the 19 November), then a rate cut next month looks likely.

However, how many rate cuts there are after that largely depends on the Autumn Budget. A big budget that bears down on inflation rather than props it up could result in rates ending up at 3% rather than the 3.5% we currently expect. For now, though, we’re sticking with 3.5% as our terminal rate call for next year, particularly as both inflation and the economy have been more resilient than expected. But, the Autumn Budget could easily change that.

We expect Tuesday’s labour market data to show pay pressures continuing to moderate. Private sector pay growth excluding bonuses – the measure the MPC cares most about because it’s more reflective of domestic inflationary pressures – should ease to 4.3% in the three months to September from 4.4% previously.

On the employment front, we think the unemployment rate will rise to 4.9% from 4.8% previously. However, the unemployment rate is derived from the Labour Force Survey (LFS), which while improving is still unreliable due to a low response rate.

So, looking to a broader set of indicators, we expect payrolls to show a small drop in October, but September’s -10k fall is likely to be revised up. We think the payroll data shows firms are finishing their adjustments to the big increase in employment costs from the last Autumn Budget.

Overall, we expect the labour market to continue loosening over the coming months, just at a slower pace than it had been, as the jobs market starts to shrug off the chill of the last 12 months.

We think the UK economy likely shrank by 0.1% in September as the shutdown at Jaguar Land Rover (JLR) dragged on manufacturing activity.

JLR, one of the UK’s biggest vehicle manufacturers, had to pause production for the whole of September following a cyber attack at the end of August.

Reflecting this, the Manufacturing PMI fell sharply in September. SMMT vehicle manufacturing data also shows a 16% m/m drop after seasonal adjustment.

We expect manufacturing output will therefore fall 2.3% in September, which alone would knock 0.2ppts from GDP growth.

We also don’t expect much of a pickup in the Construction sector when September’s UK GDP figures are released on Thursday. The Construction PMI improved in September, but remains well below the crucial 50 no-change mark, suggesting output is falling. What’s more, the UK saw a third more rainfall than it usually does in September, which tends to drag on construction activity.

Turning to the all-important services sector, we expect 0.1% output growth here to offset some of the weakness on the production side of the economy.

The wholesale and retail sector is likely to lead the way in September. Retail sales rose 0.5% on the month and new car registrations point to surging motor trades. We therefore expect the sector as a whole grew 0.8% in September.

However, there’s reason to be cautious too. Tube strikes in September are also likely to have dragged on growth in the transport sector, knocking around 0.05ppts from growth, which could lead to spillover effects elsewhere.

All told, we think a small contraction in UK GDP in September seems likely because of the JLR shutdown and tube strikes dampening activity across the month. However, this will still be enough to deliver 0.2% growth in Q3 as a whole. The question going forward is whether uncertainty around the Autumn Budget damages sentiment in Q4, causing the economy to stagnate in the final months of the year. For now, we continue to expect 0.2% growth in the final quarter of the year.

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