Berenberg Predicts October Budget Breaks Link Between Gilts and Pound Sterling

The upcoming October Budget could break the link between Gilts and the Pound Sterling according to Berenberg. The bank argues that credible fiscal tightening would calm gilt markets, allowing for lower interest rates and a firmer base for the Pound.

The UK's budget deficit has narrowed from 5.2% of GDP in 2024-25 to 4.2% in 2025-26 and is expected to reach 3.5% this year. Berenberg estimates that even with all available headroom used, the deficit will decline to 2.6% of GDP in 2029-30, unless public investment is raised.

The bank believes that tighter fiscal policy would reduce the UK risk premium and give the Bank of England more freedom to lower interest rates without reigniting inflation. This could lead to a reduction in interest rates that stimulates private sector activity.