The Bank of England’s expectations for December have been bolstered by easing to 3.6% in October. This shift in monetary policy expectations immediately affects gilt yields and, while easing financial conditions for rate-sensitive sectors such as housing and home equity. The key opportunity lies in positioning ahead of a potential policy pivot that could reduce borrowing costs across the economy.

The main narrative

The Bank of England is battling persistent inflation that has rebounded earlier in the year due to higher utility spending, firm payroll taxes, and rising food prices. However, October’s reading confirms the trend of the sector’s renewal, which supports the moderation in services inflation, from 4.7 percent to 4.5 percent and eases wage growth. This indicates that core inflation dynamics are no longer driven by strong wage pressures, which is an important signal for the Monetary Policy Committee.

At its last meeting, the bank kept rates at 4 percent, a close decision that ended a streak of quarterly cuts that began in August last year. The new inflation data bolsters the case for another rate cut in December, especially as risks to growth mount and real borrowing costs remain constrained. Economists, including KPMG’s Yael Selfin, now see the December meeting as a key moment in the monetary easing cycle.

The UK is a relative inflation outlier compared to its major peers. Eurozone inflation is 2.1% while the US sits at 3%, making Britain the highest among modern economies closely watched by global investors. The move has kept Bo’s benchmark rate at double that of the ECB, creating a yield premium that has supported sterling, but also weighed on corporate financing costs and housing affordability.

The pace of disinflation is expected to continue. The BoE projects inflation to ease to 3% in early 2026 and return to 2% in 2027. UBS forecasts an accelerated path, with inflation averaging 2.2% in 2026, suggesting a return to target in the second half of this year. Fiscal policy will also come into focus as Chancellor Rachel Reus has indicated that the upcoming budget will prioritize reducing inflation through policies designed to suppress domestic demand. KPMG expects higher taxes to offset higher taxes to fuel disinflation over the coming year.

Influence of the target market

Gilt yields have already started to rise in anticipation of policy easing. A confirmed move toward lower rates will exacerbate this trend, especially at the short end of the curve. This will be supported by lower output, which is heavily weighted towards domestic sectors such as housing, consumer services and financials. The FTSE 100, while more internationally exposed, could benefit from a weaker sterling if there is a rate cut.

Sterling faces a two-pronged threat. If disinflation accelerates and expectations of a rate cut intensify, the GBP could weaken against that and when yields benefit. Conversely, if fiscal policy supports credit and inflation trends toward target without economic deterioration, sterling may strengthen due to reduced risk premiums and improved real rate dynamics.

Fixed-income traders are increasingly positioning for a December rate cut, with two-year gilts being targeted as the most sensitive segment. Meanwhile, real estate investment trusts and mortgage lenders will be among the early beneficiaries of the rate cut as financing costs ease and housing affordability improves.

Forward view

The December bull session is now the main near-term catalyst. The market will also monitor the government’s upcoming budget, which could bolster or undermine the path to disinflation, depending on the balance between fiscal restraint and growth support. The short-term risk is that inflation is likely to stabilize rather than fall, especially if energy or food prices reverse.

Base case: Inflation continues to moderate, enabling the BOE to begin gradual rate cuts starting in December, supporting gilts and domestic equities.

Alternative case: Inflation plateaus around 3.5 percent and services inflation remains sticky, delaying cuts to early 2025 and putting pressure on rate-sensitive sectors.

The result

A strategic opportunity is emerging in UK domestic equities and short-term gilts, supported by a credible disinflation trend and the growing likelihood of a December rate cut. The key risk is renewed inflationary pressures from wages or energy, which could delay policy easing and stall investor positioning.