Leading Indicators | Autumn Budget 2024: Market Insights
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Markets React to Labour's Budget
Chancellor Rachel Reeves' budget, which introduced the largest tax hikes seen in recent decades, received a mixed response from UK financial markets. However, the response has been far more subdued than the sharp market reactions following the Conservative mini-budget two year ago.
UK gilt yields have climbed across the curve, with the 10-year yield up by roughly 30 basis points, reaching a one-year high of 4.52%, after details were released about a higher-than-expected debt raise. The pound initially depreciated slightly to $1.29, though most of this decline has since reversed. In comparison to the September 2022 mini-budget, both the rise in gilt yields and the dip in sterling following last week’s announcement are relatively modest.
While the risk-free rate has increased over recent months, this has been influenced by both global and local factors - in particular, fading fears of a US recession, and a relatively healthy domestic economy in the UK.
Implications for UKCRE
Last week’s budget delivered £40 billion of tax rises, alongside increased spending, borrowing, and investment. In short, the largest fiscal loosening in decades. This is expected to support stronger GDP growth in the coming year but may also lead to a slightly more gradual decline in interest rates.
The Chancellor opened her budget with the mantra of ‘invest, invest, invest’, focusing primarily on changes to employer NIC, inheritance tax, and other non-tax measures.
For UK commercial real estate, a few key themes stand out. Firstly, the government’s supply-side push majors on infrastructure investment, and while we wait for further detail, we can assume clear knock-on commercial opportunities. Additionally, Reeves announced a 40% relief on business rates for the retail, hospitality and leisure industry in 2025/26, up to a cap of £110,000 per business, though lower than the current rate of 75%. The budget also emphasises growth-focused initiatives, especially in green energy and regional innovation. This should be positive for foreign investors looking at the long-term prospects for the UK, as explored in our Autumn Budget analysis.
Out of the woods?
The U.S. election represents a key uncertainty for global markets as we approach the end of a tumultuous year. But amid the election excitement, there are still a few major monetary policy decisions pending before the year's end, with both the Bank of England and the U.S. Federal Reserve scheduled to meet on Thursday. Markets are currently anticipating a quarter-point rate cut from the Bank of England, which would lower the base rate to 4.75%. Meanwhile, the Federal Reserve is expected to maintain its current rate of 5.00%. For real estate investors, the anticipated rate cuts may create opportunities in the coming months and could support growth in commercial property values, particularly in sectors with strong structural demand.
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