Finance
Britain's budget reduces uncertainty, doesn't change outlook for gilts, JPM says
Published by Global Banking & Finance Review®
Posted on November 27, 2025
2 min readLast updated: January 20, 2026
Global Banking & Finance Review®
Company
Published by Global Banking & Finance Review®
Posted on November 27, 2025
2 min readLast updated: January 20, 2026
Britain's budget reduces uncertainty but doesn't change JPMorgan's outlook for rising gilt yields, with tax hikes impacting fiscal policy post-2027.
By Yoruk Bahceli
LONDON (Reuters) -Britain's tax-raising budget reduces near-term uncertainty, but doesn't change JPMorgan's expectations for government bond yields to rise next year, the bank's head of European rates strategy research said on Thursday.
Finance minister Rachel Reeves delivered a highly anticipated budget on Wednesday that raises taxes and doubles her margin to meet Britain’s fiscal targets, known as headroom, even as welfare spending rises.
"The near-term uncertainty around the budget and what the budget could have delivered in terms of the gilt market has been removed because headroom is bigger," Francis Diamond told Reuters, adding this would mean fiscal policy would be less sensitive to swings in borrowing costs next year.
"Over the medium term, I think there is always a difficulty... as you approach the 2029 election, whether those tax raising policies are delivering what they need to deliver," he said.
Gilt yields fell on Wednesday and investors welcomed Reeves' larger headroom but warned that the outcome of the budget is less certain as much of the tax hikes take effect later rather than sooner.
He added the tax hikes in the budget didn't change his view for the Bank of England to deliver three more rate cuts by June next year, then stay on hold at a policy rate of 3.25%, as the fiscal drag from the tax hikes is not immediate, given they mostly kick in after 2027.
Some investors had hoped before Wednesday that the fiscal tightening resulting from the budget would prompt the BoE to cut rates faster, supporting their positions that favour gilts.
Diamond said he maintained his expectation that 10-year gilt yields would rise to 4.75% by the end of 2026, from just under 4.50% currently.
He said uncertainty over local elections in May and whether they would lead to a leadership contest within the ruling Labour Party would be a factor driving yields higher in the second half of next year.
(Reporting by Yoruk Bahceli; Editing by Amanda Cooper)
Monetary policy involves the management of money supply and interest rates by a central bank to control inflation, stabilize currency, and achieve economic growth. It includes actions like adjusting interest rates and open market operations.
Fiscal drag occurs when inflation and rising incomes push taxpayers into higher tax brackets, increasing tax revenues without changing tax rates. This can lead to reduced disposable income and slower economic growth.
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