UK Gilt Yields Retreat Ahead of BOE Meeting

The yield on the UK’s 10-year gilt edged lower toward 4.65%, pulling back from last week’s six-month high of 4.78%, as markets adopted a wait-and-see approach ahead of the Bank of England’s upcoming policy decision, while surging energy prices continue to amplify inflation concerns. On Tuesday, US President Donald Trump indicated that military operations in Iran would continue beyond this week, while Israeli officials cautioned on Monday that the conflict could persist for “several more long weeks.” The resulting spike in energy prices has prompted traders to price in a nearly 50% chance of a Bank of England interest rate hike in November, a stark reversal from early March, when markets were pricing in two rate cuts for the year. At this week’s meeting, analysts will closely watch the vote split among policymakers, with a 7-2 or 6-3 decision to hold rates seen as the most likely outcome.

The yield on the UK 10-year gilt hovered just below 4.7%, after hitting its highest level since early September on Friday, as ongoing Middle East tensions fueled concerns over the Bank of England’s policy outlook ahead of this week’s decision. Israeli officials warned the conflict could continue for “several more long weeks,” while US President Donald Trump said Iran is “not ready” to reach a deal. Rising energy prices have led traders to revise their interest rate expectations, with markets now pricing in around 23 basis points of a hike for December, just below a quarter-point increase, after fully pricing in a hike last week. This represents a notable turnaround from early March, when investors anticipated two rate cuts this year. For the upcoming March meeting, focus will be on the vote split, with a 7-2 or 6-3 decision to hold rates considered the most likely outcome.

The yield on the UK 10-year gilt rose above 4.7%, touching its highest level since early September, as investors increased bets that the Bank of England could raise interest rates later this year. Expectations of tighter monetary policy have strengthened amid a sharp rise in energy prices linked to escalating tensions between the US, Israel, and Iran. Oil prices surged above $100 per barrel as the conflict showed no signs of de-escalating, raising concerns that higher energy costs could reignite inflationary pressures across Europe. As a result, investors currently price in roughly an 80% probability of a 25-basis-point BOE rate hike by the end of the year. Meanwhile, data from the Office for National Statistics showed the UK economy stalled in January, missing expectations for 0.2% growth. Services activity was flat and production fell 0.1%, while GDP increased just 0.2% over the three months to January, slightly below forecasts.