1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 77
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Gilt yields remain at elevated levels and experienced volatility in 2025
4.9
4.7
4.5
4.3
Dec 2024
Feb 2025
Apr 2025
Jun 2025
Aug 2025
Oct 2025
Source: Bloomberg Finance LP, Scotia Wealth Management
Political constraints add another layer of uncertainty. High public disapproval rates limit the
government’s room to manoeuvre, reducing the scope for decisive reforms or more front-loaded
consolidation. Persistent political uncertainty and the perception of fiscal fragility all remain
headwinds to business confidence and household expectations, reinforcing cautious behaviour
across the economy.
Against this backdrop, monetary policy continues to evolve carefully. The Bank of England’s 25
bps rate cut at the December meeting marked another step toward reducing restrictiveness, but
policymakers remain wary of easing too quickly. Sticky inflation and fiscal uncertainty argue for a
gradual approach. Our baseline assumes two further cuts in the first half of 2026, taking the
policy rate to around 3.25%, followed by a pause as the balance between growth and inflation
risks becomes clearer and the BoE takes its policy rate to a neutral level.
Overall, the U.K. faces another year of modest growth, constrained by weak private demand,
limited fiscal space, and cautious policy settings. While inflation is expected to fall back toward
target over the medium-term, near-term pressures and political constraints are likely to keep
both fiscal and monetary policy on a tight leash, delaying a more durable recovery until beyond
2026.
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