Economy Round-up

The state of the UK economy has shifted significantly over the last twelve months. The new labour government has now laid out its plans for growth and balancing the books.

The likely impact of the budget on inflation and interest rates would appear to be quite negative. The growth of the UK economy is also predicted to stagnate further.

There continues to be strong outside factors affecting inflation. These outside factors could be more turbulent now Trump is returning to power in the US.

Following the last budget, inflation is predicted to be higher than the last forecast in March. This is due to the agreed public sector pay rises, minimum wage increases, and an increase in employer national insurance from April 2025.

Inflation is now predicted to be an average of 2.6% for 2025, 2.3% in 2026, 2.1% in 2027, 2.1% in 2028 and 2% in 2029. This means inflation will be above the 2% target for most of the next four years.

The impact for farming businesses will be more inflation on costs than predicted, and there could also be a squeeze on farm receipts due to the cost-of-living crisis continuing for longer.

The current bank of England base rate is 4.75%. In the last monetary policy committee (MPC) meeting the committee voted to hold interest rates in a 6-3 voting split.

With inflation now predicted to be above the 2% target for longer, the bank of England has said that future interest rate cuts may not come as often and as quickly as previously thought.

The next MPC meeting is in February and whilst the 6-3 split from the last vote in December indicates that a cut could come in February, it is likely that for the short to medium term we should get used to a base rate above 4%.

The impact for farming business is that their variable rate debt will remain higher for longer. This will put more pressure on cashflow.

Whilst the main impact for farming businesses of the budget is the changes to inheritance tax relief, the impact of the budget on the UK economy will put a further squeeze on cash flow.