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A pre-Christmas rate cut is in the balance as the Bank of England meets this week to decide whether to keep the cost of borrowing on hold.
Hopes have risen in recent weeks that interest rates could be lowered for the sixth time in just over a year amid signs inflation may have peaked and pay deals moderated.
But looming large over the Bank's rate-setters is the shadow of Rachel Reeves' Budget later this month when the Chancellor is expected to launch another round of growth-defying tax rises to balance the books.
Experts say until the scale of her tax grab and any public spending cuts is known the Bank will sit on its hands by keeping rates at 4 per cent.
'It is likely to be a factor in the December decision,' said Ellie Henderson, economist at investment bank Investec.
Inflation at 3.8 per cent was 'still nearly double the Bank's target', giving it further cause to pause this month, she said.
Traders reckon there is a 50:50 chance of a rate cut at the Bank's December meeting.
The growing prospect of a cut has put pressure on the pound, which last week fell below €1.14 – its lowest level against the single currency in two and a half years. Against the dollar sterling dropped to a six-month low of $1.31.
'Sterling has had a Halloween shocker,' said Simon Phillips of travel cash firm No1 Currency.
The Mail on Sunday recently revealed that traders had been raising their bets against the pound to levels seen in the Liz Truss 2022 mini-Budget crisis.
In an ominous sign for Reeves, speculators have resumed betting on a fall in sterling's value ahead of the Budget, which could see her have to find up to £50 billion to meet her fiscal rules.
A Cabinet minister today warned there will be 'consequences' from recent weaker economic forecasts at this month's Budget as he declined to repeat Labour's promises on tax.
Defence Secretary John Healey insisted no decisions had been made on the final shape of the Budget, due on November 26.
But he added that the Office for Budget Responsibility (OBR) now saw much worse 'scarring' on the economy than previously thought and the Chancellor would make 'announcements to deal with those challenges'.
And asked whether the Government would stick to its manifesto pledge not to raise income tax, national insurance or VAT, Mr Healey declined to repeat the promise.
Meanwhile, Sarah Coles, head of personal finance at Hargreaves Lansdown, says: 'We're not out of the woods yet on inflation, but the fact it held steady in September indicates that we're not headed any deeper into the undergrowth either.
'It doesn't change the fact the Monetary Policy Committee is highly likely to leave rates on hold next week, but it may mean cuts actually kick in before the end of the year.
'Since the Bank of England started cutting rates in August 2024, a hold next week would mean this is the first quarter where it hasn't done so, but inflation at 3.8 per cent means it can't be in too much of a hurry.
'It's expecting inflation to fall in the coming months, at which point cuts could be on the cards.
'The Bank won't want to drag its feet, given the weakness creeping into the employment market and the fact that growth has been so sluggish.'
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