The UK Autumn Budget is just around the corner, and there’s a lot riding on what the chancellor decides to do next. Investors are watching closely, not just for the usual tax and spending headlines, but also at what it could mean for Gilts. With the Chancellor Reeves’s hands tied to deliver much in the way of stimulus and the labour market looking a bit shaky, we see scope for inflation to reduce in the coming months. Against this backdrop, Gilts look like a compelling investment right now, and we’ve positioned our Global Government Bond portfolios to reflect that view.

Evaluating the UK economy

To get a sense of what might be in store on 26 November, and what affect it will have, it is useful to take a step back and better understand the current state of the British economy.

Inflation

Inflation in the UK has been stubbornly high and well above the Bank of England’s 2% target. While in the eurozone, inflation has come down close to the target, UK CPI has moved in the opposite direction. Three reasons explain this discrepancy: wages, administrative prices and food prices.

• Annual wage growth of around 4.5%-5% has been trending well above numbers that would be consistent with the inflation target (Source: UK Office for National Statistics, as at September 2025). This is partially driven by a continuing increase in the National Living Wage (50% increase since 2019), but also because of structural shortages in the UK labour market (Source: https://www.gov.uk/national-minimum-wage-rates, as at April 2025).
• Administrative reforms, including higher taxes and enhanced regulations, have had a significant impact on household bills.
• Food prices have been impacted by external factors as well as internal ones. Higher regulatory costs and increased labour costs (National Insurance contribution increases) have been driving inflationary pressures in this part of the basket (which contributes 11%) and is directly linked to households’ inflation expectations.

We believe that these inflationary pressures are mostly explained by government and regulatory policies, rather than coming from organic strength in domestic consumer demand that would trigger second round effects. 

This high inflationary environment in the UK is the main reason why UK Gilts continue to trade at a premium compared to other markets, such as the US and the eurozone. It has also prevented the Bank of England (BoE) from moving away from its “careful and cautious” approach to interest rates, with some members of the central bank even questioning whether any further policy loosening is necessary.

Having said this, UK inflation in the second half of the year has so far turned out to be more moderate than expected, and below the BoE’s forecasts. Although the country is not out of the woods yet, inflation is expected to begin easing with a more pronounced decline from April 2026 as base effects become more significant, given diminished inflationary pressures from administrative and food prices.  All things remaining equal, this should ultimately allow the BoE to cut more than what is currently priced by markets.

Labour market

The Bank of England’s Decision Maker Panel Survey suggests that the rise in labour costs resulting from measures announced in the 2024 Autumn budget has weakened employment in a region experiencing sluggish consumer demand. In addition, independent think tanks like the Resolution Foundation indicate that, faced with rising costs, many companies are choosing to freeze or reduce their demand for workers.

As a result, the economy is experiencing a “no hiring, no firing” environment, with growing slack and heightened risks that may create additional barriers for job seekers, especially in sectors most impacted by policies such as increases in the National Living Wage or National Insurance contributions.

Some members of the BoE’s Monetary Policy Committee have placed greater emphasis on this ongoing deterioration in the labour market to vote for further monetary policy easing in order to prevent a sharper economic slowdown.

We think the current subdued labour market conditions are likely to continue, given growing evidence of wage moderation, particularly within the private sector. This trend is fundamental for supporting a decline in services inflation, which is supportive for owning Gilts at current valuations.

Fiscal policy

The government has publicly acknowledged that inflation is too high and reducing the cost of living is a top priority. Rachel Reeves has indicated that targeted measures to address this will be announced in the upcoming budget, confirming that both tax rises and spending cuts are options. Certainly, markets would welcome measures that would not only reduce inflation but also increase the current headroom to provide a larger cushion against future shocks. A credible approach to reform spending and targeted measures to decrease the burden that both companies and households face would reinforce the market’s appetite for Gilts.

This approach would not only directly decrease pricing pressures but would also help achieve improved fiscal outcomes by lowering the administration’s debt servicing cost burdens, as yields would decrease in response to improved inflation expectations.

Conclusion

Near-term trends in inflation has created an additional risk premium in owning Gilts compared to other developed market government bonds. However, we see signs that the labour market is continuing to deteriorate, which should support a decline in wage growth and services inflation going forward. The Autumn Budget can be a material driver for the direction of Gilts, but early indications suggest the government is prepared to increase taxes and reduce spending, which leaves Gilts attractively priced at current valuations.

In our Global Government Bond portfolios, we express our positive sentiment on Gilts in several ways. Our expectations of easier inflationary pressures that would allow the Bank of England to cut rates below what is anticipated by the market are implemented by taking an outright long position at the front end of the Gilts curve. Finally, fiscal policy divergence between the UK – where we anticipate Reeves to announce restrictive measures – and Germany – where expansionary measures will be implemented – is expressed by being long Gilts vs Bunds.