Inflation, interest rates and the Autumn Budget: What you need to know

For investors, two key themes dominate discussions around the Autumn Budget: inflation and interest rates. These affect government policy but also influence markets and your portfolio.

Understanding how they interact and what they mean for your investments is essential in dealing with the changes announced in the Budget and the months ahead. However, what’s important too, is knowing the complexities around Chancellor Rachel Reeves’ decisions and the tight rope she’s walking on.

As the Chancellor prepares her first Autumn Budget, she faces a complex balancing act. Inflation remains stubborn at around 3.8%, well above the Bank of England’s (BoE’s) 2% target, and interest rates are still high.

Whatever government policy she adopts, it will matter to investors. Markets are wary of rising government borrowing and the Chancellor must stimulate growth without undermining the BoE’s inflation-fighting efforts. While keeping the bond market onside, she must manage fiscal rules and find politically acceptable ways to raise revenue, all without derailing economic stability.

The bond market often gets portrayed as an invisible force punishing governments for overspending, but it’s really driven by supply and demand. When short-term spending exceeds tax revenues, the resulting deficit is typically financed through borrowing. That means issuing more government debt into a market which is already anticipating it. If you add the UK’s existing debt to it, this creates a vicious cycle with more borrowing to cover rising interest and repayment costs. With cost of long-term debt at its highest level in 15 years, markets are alert to any sign that fiscal rules might be stretched or abandoned.

Fiscal rules are the financial guardrails a  government sets to manage public finances responsibly. It’s like a self-imposed contract between the government and the bond market, signalling how much debt investors can expect in the future. If the Chancellor softens the rules too much, then borrowing costs could rise sharply. Alternatively, if she keeps them too tight it could result in little room for manoeuvre on growth initiatives.

Reeves is unlikely to scrap the rules entirely, but subtle changes to definitions could create headroom without spooking markets. That means finding revenue through measures that are politically palatable, such as freezing income tax thresholds (fiscal drag), adjusting property taxes, or revisiting pension allowances, rather than sweeping reforms.

When it comes to the Autumn Budget, Reeves faces two broad paths, each with distinct consequences for investors:

1. Pro-growth  
In the run up to the Budget, pressure on the Chancellor has intensified as data showed muted growth in August following a contraction in July. The Office for National Statistics (ONS) said gross domestic product (GDP) rose by just 0.1% month on month in August after falling by 0.1% in July. The ONS added that in the three months to August, GDP grew by 0.3%, compared with 0.2% in the three months to July¹, which is not a sign of strong momentum.

Announcing tax cuts could be the answer but it won’t be the solution to all the Chancellor’s challenges. However, equity markets may benefit. Corporate tax cuts could provide a boost by increasing net profits and supporting higher equity valuations. But while fiscal stimulus through tax reductions might spur growth, it also risks fuelling demand-driven inflation, particularly if personal tax cuts give households more disposable income. Stronger consumer demand could push prices higher and force the BoE to raise interest rates again.

Additional government spending could also stimulate economic activity, especially in infrastructure and industrial sectors. The problem lies in how bond markets would react. Increased borrowing typically leads to higher gilt (UK government bond) yields as investors demand greater compensation for inflation risk and more debt. Rising yields increase borrowing costs and can negatively impact equity valuations, a dynamic seen during the 2022 mini-Budget under Prime Minister Liz Truss and Chancellor Kwasi Kwarteng. This is a scenario the current Chancellor will be keen to avoid.

2. Austerity 
Austerity (spending cuts combined with tax increases) typically dampens demand and slows economic growth. While this approach can help bring inflation down, it is politically unpopular because it reduces household disposable income. It could also result in stagflation, where the people suffer from an economy with negative growth and persistent inflation. In this scenario, consumer-facing sectors such as retail, travel and leisure would likely feel the strain, while industries reliant on government contracts, including construction and industrials, could also suffer.

Financials may face headwinds too, as slower growth and tighter margins reduce lending and investment activity. However, contractionary fiscal policy would generally lower inflation expectations and bond yields, paving the way for potential interest rate cuts over time. Fiscal discipline could support gilt prices, with medium- to longer-dated gilts benefiting most, though volatility tends to be greater the longer the maturity.

For investors, this highlights the importance of having a portfolio that can weather both inflationary pressures and policy uncertainty. So, what does all this mean for your portfolio? The answer lies in diversification. Remember, all investments carry risks and you may get back less than you invested.  

Equities
In an inflationary environment, companies with strong pricing power (those able to pass on higher costs to consumers) tend to fare better when inflation is elevated. Sectors such as consumer staples and healthcare often demonstrate resilience because of the demand for their products regardless of economic conditions.  

However, not all equities are created equal. Businesses with high levels of debt may struggle as borrowing costs rise, while those in discretionary sectors could face headwinds as consumers tighten their belts. Tech companies with relatively strong pricing power could perform well, as these are capital light business and offer essential services like cybersecurity.  

Fixed income
Bonds still play an important role, but with higher inflation the focus has shifted. Longer-dated bonds are more sensitive to interest rate movements, making them vulnerable. Shorter-duration bonds offer greater stability and lower volatility, while also providing a tax-efficient alternative to cash for higher-rate taxpayers. Positioning portfolios toward shorter maturities helps reduce interest rate risk while generating income. 

Gold  
Gold has historically performed well during periods of uncertainty and when confidence in currencies weakens. Its recent strength reflects concerns about fiscal sustainability and changes in the US dollar's status as the global reserve currency. Alternatives, like gold, can help smooth returns and provide diversification, but they work best as part of a balanced portfolio, as underlying stocks can be more volatile.  

Markets will be watching whether Reeves prioritises growth or inflation control. Each path carries distinct risks and potential benefits for investors. The Chancellor’s choices may create volatility, but disciplined, forward-looking positioning can help investors capture opportunities while managing risk.  

The government’s challenges require more than short-term reactions; it calls for a strategy that balances risk and opportunity across multiple asset classes. Our goal is to help you embrace what’s next with strategies designed to protect and grow your wealth in all market conditions.  

For everything you need to know about the Autumn 2025 Budget, visit our Budget hub for the latest news and updates, and sign up for our webinar series to stay informed both before and after Budget day.

1. Independent.co.uk, Chancellor facing further Budget challenges after muted economic growth, 16 October, 2025