UK Gilt Yield Falls Below 5% as Oil Prices Ease Inflation Fears

The UK 10-year gilt yield fell below 5% as declining oil prices helped ease short-term inflation concerns. Brent crude retreated from two-month highs after the U.S. and Iran paused hostilities and resumed diplomatic contacts, prompting money markets to slightly scale back expectations for further monetary tightening. Investors now turn their attention to the Bank of England's policy decision later this week, with policymakers widely expected to leave interest rates unchanged at 3.75%. Recent inflation data has reinforced that view, with annual consumer price growth slowing to a 15-month low of 2.6% in June, below the BoE's forecasts. A delayed pass-through of higher wholesale energy costs to regulated household bills has also kept UK inflation below that of the U.S. and the euro area, where the European Central Bank is still expected to raise rates again in September or October.

The UK 10-year gilt yield eased to 5.07%, slipping from the two-month high reached on Thursday as oil prices retreated after Brent briefly climbed to $100 per barrel, while investors assessed a fresh batch of economic data. UK retail sales rose 1% in June, beating expectations for a 0.3% decline, supported by warmer weather and stronger spending during the football World Cup. Consumer confidence also improved to a six-month high in July, while the Bank of England's Decision Maker Panel survey pointed to easing inflation expectations. Meanwhile, the S&P Global PMI showed UK business activity returned to growth, surpassing forecasts. On the trade front, the US announced new tariffs of 10% to 12.5% on dozens of countries, including the UK and the EU. The UK government said the measures would not negatively affect British businesses, noting that the existing UK-US trade agreement remains in force and provides improved access for exports such as whisky and medical technology.

The UK 10-year gilt yield climbed toward 5.1% on Thursday, reaching its highest level since May 20, after Finance Minister John Healey warned about the rising cost of doing business alongside persistent cost-of-living pressures. The 30-year gilt yield, which is particularly sensitive to fiscal risks, also rose to 5.78%, its highest level since May 19. Earlier in the day, Prime Minister Andy Burnham announced a 20% cut in business rates for pubs, clubs, and live music venues starting in April, marking the third announcement of support measures for businesses and households in three days. He also reiterated his commitment to maintaining fiscal discipline. Adding to the upward pressure on yields, oil prices climbed to near two-month highs amid escalating tensions in the Middle East, fueling inflation concerns. Money markets now price in nearly two Bank of England's quarter-point interest rate hikes by the end of the year.