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Budget policies expected to ease inflation pressures
The UK's inflation rate could drop by as much as half a percentage point next year due to fiscal measures introduced in Chancellor Rachel Reeves' November Budget, a senior Bank of England official has indicated.
Key measures and their impact
Clare Lombardelli, the Bank's deputy governor for monetary policy, told the Commons Treasury Committee that fuel duty caps, energy price reductions, and frozen rail fares would collectively slow price growth from April 2026. The Office for Budget Responsibility (OBR) previously estimated a 0.4% reduction in inflation from these policies.
Lombardelli clarified that the effect would be "mechanical," driven primarily by lower energy costs, fuel duty adjustments, and rail fare freezes. "That will just shift inflation," she said. "That is by far the biggest impact for us."
Policy details and household savings
Reeves extended a 5p cut in fuel duty until September 2026, removed green levies from energy bills, and scrapped a scheme funding home insulation for low-income households. The Treasury estimates these changes will save households £88 annually, with an additional £59 saved from the insulation scheme's cancellation.
The government also froze rail fares until March 2027-a first in decades-breaking the usual January increase tied to the retail price index (RPI) plus 1%. However, electric and hybrid vehicle drivers will face new road taxes from April 2028, starting at 3p per mile for electric cars and 1.5p for plug-in hybrids, with rates rising annually in line with inflation.
Economic growth and political reactions
While the Budget's inflation impact is significant, Lombardelli described its effect on economic growth as "quite small," adding just 0.2% to GDP in 2027. "There is an effect there," she noted, but emphasized its short-term nature.
Conservative leader Kemi Badenoch criticized Reeves' 2024 Budget, arguing that its "tax and spend decisions" had exacerbated inflation. The chancellor, however, has framed the measures as part of Labour's broader effort to stabilize prices and ease cost-of-living pressures.
Inflation outlook
UK inflation currently stands at 3.5%, with the OBR projecting a decline to 2.5% next year and a return to the Bank of England's 2% target by 2027. The Budget's measures are expected to accelerate this trajectory, though their long-term impact remains under scrutiny.
