The United Kingdom’s newly unveiled tax-raising budget has helped remove some immediate uncertainty surrounding government finances, yet it is not expected to alter the trajectory of UK government bond yields heading into next year, according to JPMorgan’s head of European rates strategy, Francis Diamond.

The budget—presented by Finance Minister Rachel Reeves—has been one of the most closely watched fiscal moments of the year. Reeves introduced a package of tax increases while also expanding the fiscal “headroom” Britain uses to measure its ability to meet budgetary rules, even as welfare spending continues to climb. The larger headroom gives the government more space to manage borrowing costs without threatening its fiscal targets.

Diamond told Reuters that the budget’s immediate impact has been to reduce short-term concerns in the gilt market. “The near-term uncertainty around the budget and what it could have meant for gilts has been removed because headroom is bigger,” he explained. This expanded buffer means fiscal policy should be less reactive to fluctuations in borrowing costs throughout next year.

Medium-Term Concerns Persist Ahead of 2029 Election

While the increased headroom offers relief for now, JPMorgan warns that Britain’s long-term fiscal picture remains complicated. Diamond noted a major concern: whether the newly introduced tax measures will deliver the necessary revenue as the country approaches the next general election in 2029.

Gilt yields fell immediately after the budget announcement, with investors responding positively to the clearer fiscal direction. However, market analysts caution that many of the tax increases will not take effect until after 2027, making the long-term outcome less predictable.

No Shift Expected in Bank of England Rate Path

JPMorgan does not expect Reeves’ budget to influence the Bank of England’s interest-rate plans. Diamond maintains that the central bank is still likely to cut interest rates three more times by June of next year, bringing its policy rate down to 3.25%, before pausing. The delayed nature of Reeves’ tax hikes means they will not create an immediate fiscal drag that might push the BoE toward a more aggressive cutting cycle.

Some investors had previously speculated that a stricter budget could pressure the central bank into faster rate cuts, which would be supportive of gilt investors’ positions. However, JPMorgan’s view is that the economic impact will materialize too slowly to influence the near-term strategy of the Bank of England.

10-Year Gilt Yields Expected to Rise

Diamond reaffirmed JPMorgan’s forecast for 10-year gilt yields to climb to around 4.75% by the end of 2026, up from just under 4.50% at present. He cites ongoing political risks—including next May’s local elections and the possibility of leadership tensions within the ruling Labour Party—as potential yield-moving catalysts later in 2025.

Following the budget announcement, several major institutional investors increased their exposure to UK gilts, showing broad approval for Reeves’ decision to strengthen fiscal headroom and reduce immediate market uncertainty.