UK two-year gilt yields fall after inflation cools

LONDON, Nov 19 (Reuters) - Yields on short-dated British government bonds fell on Wednesday as investors bet that an expected drop in consumer price inflation will prompt the Bank of England to cut interest rates at the end of this year.

Britain's annual inflation rate fell to 3.6% in October, the first decline since May, in line with market and BoE expectations. Underlying measures of price growth, closely watched by the BoE, also fell.

Two-year gilt yields - which are particularly sensitive to interest rate expectations - fell around 3 basis points to 3.776%, the lowest since November 14 and were 2 bps lower than equivalent German bonds.

Interest rate futures were pricing a 86% chance that the BoE will cut its Bank Rate to 3.75% from 4% by its December meeting, slightly up from about 83% before the inflation data, based on LSEG data. They were fully pricing in a 25 basis-point cut by February 2026 and factored in 61 bps of cuts by the end of 2026. (Reporting by Suban Abdulla; editing by David Milliken)