Economy

January 2026 Forecast

Long rates settle

Gilt yields will remain a defining feature, due to fiscal constraints and elevated government debt levels. Our expectation is for the 10-year gilt yield to settle at c. 4.3%. Against this we expect one cut in Bank Rate of 25bps to 3.5%.

Midyear review

• Having peaked c. 5%, in part due to higher inflation expectations, we expect 10-year gilt yields to moderate slightly before stabilising for the remainder of 2026. Over the following years, we expect modest gilt yield compression supported by a more benign inflationary environment.
• However, markets are likely to remain cautious in the near term. Uncertainty surrounding the policy of a new government may create volatility in the bond market.

January 2026 Forecast

Inflation curtailed

We expect inflation to trend closer to the 2% target in 2026 – in part helped by disinflationary shifts in regulated prices in Q2.

Midyear review

• Inflation has risen, driven by higher oil prices following the closure of the Strait of Hormuz. We now expect CPI inflation to peak at c. 3.5% year-on-year in Q4, up from our previous forecast of a return to the 2% target, before gradually easing back to target by 2028.
• With domestic demand remaining weak, pressure on inflation from excessive demand is limited – any further upside surprises will likely be due to supply issues in commodity prices.

January 2026 Forecast

Labour market loosens

Labour markets will remain relatively tight in 2026 but with some increase in unemployment as the year progresses. Rising unemployment is seen as a dampener for the consumption economy and will increase the likelihood of interest cuts.

Midyear review

• The UK labour market has weakened and is likely to continue this trajectory, with limited job creation and elevated unemployment.
• In part, this reflects the impact of past policy measures that increased labour cost. We expect unemployment to hit 5.7% by year-end before falling back during 2027.

H2 2026 Outlook

Navigating geopolitics with a move towards emerging optimism

At the start of 2026, CBRE forecast a moderate 1.2% GDP growth for the year, viewing it as a period for foundational development. However, this outlook shifted dramatically at the end of February with the onset of the US-Iran conflict. The conflict created an inflationary environment and pushed our view on CPI inflation higher. With higher inflation, the prospect of previously forecast interest rate cuts diminished. We now see rates holding steady for the rest of 2026.

Throughout March, April, and May, Brent crude oil prices consistently traded above USD $90 a barrel due to the geopolitical tensions and disruptions to global oil supplies, particularly concerning the Strait of Hormuz. A memorandum of understanding was established between the US and Iran which led to a noticeable decrease in Brent crude prices to below USD $80 a barrel. Since then, tensions have risen and oil price followed. Persistently higher oil prices are likely to create margin squeezes for business and/or inflation for consumers; neither a positive for economic growth. However, at the time of writing, new negotiations were rumoured and the oil price has responded.

Our view on 10-year gilts is higher than earlier in 2026, although it remains within the range of the Bloomberg consensus forecasts and sits marginally above the June Median. However, changes in policy of the new Prime Minister and Chancellor may create additional unknowns for near term economic predictions.

Figure 1: Forecast changes for 2026, January vs July

Figure 2: UK 10-year gilt yield