UK Gilt Yields Dip After Dovish BoE Signals

UK 10-year gilt yields fell to 4.55%, after the Bank of England kept interest rates unchanged at 3.75% but signaled a more dovish stance than markets had expected. Although the decision to hold was widely anticipated, the vote split surprised investors, with four of nine MPC members favoring an immediate 25 basis point cut to 3.5%, citing expectations that CPI inflation will return toward the 2% target from April. The Bank highlighted that risks from persistent inflation have eased, while weaker demand and a softening labor market have become more pronounced. Gilt yields had reached an over three-month high of 4.612% on Thursday, driven by rising political uncertainty after Prime Minister Keir Starmer appointed Peter Mandelson as UK ambassador to the US, a move attracting scrutiny over Mandelson’s past links to Jeffrey Epstein.

UK 10-year gilt yields climbed to 4.6%, their highest level since mid-October, as renewed political uncertainty pressured longer-dated debt ahead of the Bank of England’s policy announcement later today. The spread between two- and 10-year gilts widened to its largest since 2018, highlighting growing term premia and investor unease. Political risk has intensified following Prime Minister Keir Starmer’s appointment of Peter Mandelson as UK ambassador to the US, a move that has drawn scrutiny due to Mandelson’s past links to Jeffrey Epstein and raised fresh questions about the durability of Starmer’s leadership. Meanwhile, the Bank of England is widely expected to leave the benchmark interest rate unchanged at 3.75%, with markets focused on the minutes, forward guidance, and the inflation and labor market outlook. While policymakers continue to signal that the next move in rates is likely downward, uncertainty remains around the timing, pace, and ultimate extent of any easing cycle.

The UK 10-year gilt yield fell to around 4.505%, moving further away from the ten-week high of 4.5527% on January 28, as markets await the Bank of England policy meeting this week. Investors are positioned for the BoE to hold rates at 3.75% on Thursday, with officials expected to offer limited guidance on the timing of future cuts while inflation remains elevated. December inflation at 3.4%, the highest in the G7, and persistent concerns over underlying price pressures have led markets to scale back easing bets. Traders now price almost no chance of a cut this week and less than a 50% probability of more than one cut this year, compared with expectations for two cuts in mid-January. Recent UK data has been resilient, including an improvement in manufacturing PMI and steady economic momentum, supporting the view that the BoE can stay cautious.