UK Gilt Yields Rise on Oil-Driven Inflation Concerns

The UK 10-year gilt yield climbed to 4.97% on Wednesday, rebounding from two-week lows as renewed military exchanges between the US and Iran drove oil prices higher, reviving inflation concerns. Investors also remained cautious ahead of the US Federal Reserve's policy decision later in the day and the Bank of England's meeting on Thursday, both of which are expected to provide further guidance on the outlook for interest rates. The Federal Reserve is widely expected to keep rates unchanged, although markets still assign roughly a 30% chance of a 25-basis-point hike. In the UK, the Bank of England is also expected to leave its Bank Rate at 3.75%, with investors closely watching the vote split for clues on the future policy path. Recent data showed UK inflation slowed to a 15-month low of 2.6% in June, below the BoE's forecast. However, businesses and government officials have warned that the recent spike in energy prices could lift inflation again in the coming months.

The UK 10-year gilt yield fell toward 4.95% as declining oil prices helped ease short-term inflation concerns. Brent crude retreated from two-month highs after the US 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. The delayed pass-through of higher wholesale energy prices to regulated household bills has helped keep UK inflation below that of the US and the euro area, where rate hikes remain expected 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.