Inflation is set to fall in 2026, prompting rate cuts and supporting growth and gilt returns · In 2025, growth in the U.K. was below trend, with a significant weakening in the labor market. Despite the weak picture for domestic demand, core inflation was high throughout the year, which further squeezed real incomes and household real spending. It also constrained the Bank of England from easing interest rates more aggressively from currently restrictive levels. · Major views at a glance: importantly, we expect inflation to fall in 2026, services inflation especially. The inflationary effects of previous policy decisions - e.g., a minimum wage increase - and energy and regulated price rises should roll-off. · With inflation falling, we expect the Bank of England to cut its policy rate by at least 75bps this year. This would move rates into more normal territory and support · Falling interest rates, a government operating within its fiscal rules, and lower U.K. bond issuance (at the long-end especially), should all support lower gilt yields.