Director Weekly  News that inflation has eased will be of some comfort to business leaders and policymakers alike in the run-up the Budget

Headline inflation fell to 3.6% in the year to October, down from 3.8% in September. Core inflation – excluding energy and food – was 3.4%, down from 3.5%; goods and services inflation eased too, though food inflation picked up to 4.9%.

What does this mean for the UK economy and for businesses?

1. A interest rate cut in December is now highly likely

Falling inflation has further raised expectations that the Bank of England will cut interest rates on 18 December, especially since we’re now seeing core inflation inching downwards.

That expectation will surely be reinforced by next week’s Budget. It seems that the Chancellor will deliver a fiscal tightening in the region of £30bn, which will have a sizeable economic impact. For context, a tightening of that scale is similar to the austerity period of 2010-2016, when the Conservative-led Coalition government averaged a 1% reduction in borrowing per year – or to the late 1990s.

Given that economic activity is already soft, this tightening will weigh heavily on the economy – which makes a continued downward trajectory for interest rates more likely.

The Bank rate is currently forecast to bottom out at 3.5% in the second half of 2026, staying there into 2027. We may now see rates come down closer to 3% during 2026.

2. An interest rate cut will be welcomed by business – but other concerns are acute

Lower interest rates were ranked as the fourth-most popular potential change in the policy environment in our research at the start of 2025. A cut in December will undoubtedly be welcome.

But note that the top three policy priorities were a reduction of the tax burden, a scaling back of planned employment law reforms, and a trade deal with the EU.

While the government has delivered improved trading rules with the EU, concerns about another rise in business taxes – and the Employment Rights Bill – are sky high.

3. Economic growth is likely to be weaker in 2026

It’s likely that growth expectations will be revised down for next year.

The Chancellor’s decision to rule out an income tax increase, which would have been the least-bad option for growth, means she will have to balance the books via other means.

Unfortunately, the ‘smorgasbord’ approach now being discussed – raising a little here, a little there – is the most negative scenario for growth.

Lots of small, fiddly tax changes is likely to eat away at confidence. And adding complexity to the tax regime will increase the administrative burden on businesses (contrary to the government’s aim of reducing red tape).

4. Consumer confidence might be stronger than expected

Perhaps the most optimistic implication of this week’s data is that with interest rates set to fall, no income tax hike, and the Chancellor promising to take action to help consumers cope with high prices (potentially scrapping VAT on domestic electricity bills) we might see a stronger-than-expected rebound in consumer demand.

Yet that’s far from certain – the latest data from GfK shows consumer confidence dropping. A Budget that pleases nobody has the potential to hit both business and consumer confidence, leading to weaker demand.

Evidence that inflation is inching down will be welcomed by directors. Now, all eyes will be on next week’s Budget.