UK Gilt Yields Edge Higher as Oil Sell-Off Pauses

UK 10-year gilt yields edged higher to 5.04%, after touching a near two-week low on Wednesday, as Brent crude prices paused their recent sell-off. Still, the sharp decline in oil prices in recent sessions has eased inflation concerns and prompted markets to push expectations for the next Bank of England rate hike from late 2026 into 2027. LSEG data showed around 24 bps of tightening priced in by December and 36 bps by the February 2027 meeting. Less than 4 bps is priced in for the BoE's September meeting, implying about a 15% chance of a hike. Most economists have long expected the BoE to keep rates unchanged at 3.75% this year, although markets had been pricing a hike amid concerns over a potential escalation in the US-Iran conflict. UK inflation rose to 2.9% in July, driven by higher household energy bills, and is expected to increase further toward year-end, while the labour market remained subdued. Investors now await Fed Chair Kevin Warsh's speech at Jackson Hole on Friday.

UK 10-year gilt yields fell below 5%, hovering at their lowest level since August 14, as falling oil prices raised hopes that the Strait of Hormuz could reopen, easing concerns over inflation. Iran held talks with Oman on reopening the Strait, with Oman’s foreign ministry saying a temporary corridor could be announced soon. Unverified reports also suggested that the US and Iran could reach a new ceasefire agreement in the coming days. Still, gilt yields remain elevated amid expectations for Bank of England rate hikes this year, alongside concerns over persistent inflation and rising government debt. Markets are pricing at least 25 bps of BoE tightening by year-end. UK inflation accelerated to 2.9% in July, its highest level since March, and is expected to rise further toward year-end. Markets will also focus on the government’s first budget under Andy Burnham in October. On Tuesday, Britain unveiled plans to spend £10 billion on lower-cost housing for renters, with a focus on London.

UK 10-year gilt yields remained above the 5% threshold as investors weighed persistent inflationary pressures stemming from still-elevated oil prices, potential fuel supply disruptions, low Eurozone gas inventories, and the prospect of a prolonged Iran conflict. Meanwhile, markets awaited Fed Chair Kevin Warsh’s Jackson Hole remarks on Friday, which could offer clues on the interest-rate outlook. In the UK, money markets continue to price in one Bank of England rate hike by year-end, with another 25-basis-point increase expected by early 2027. Inflation rose to 2.9% in July, its highest since March, while core inflation reached 2.6%. Meanwhile, stronger PMI readings and consumer confidence at a two-year high provided an early boost for new Prime Minister Andy Burnham, though the UK remains vulnerable to renewed inflationary pressure from the Iran conflict.