UK Gilt Yields Ease as BoE Rate-Hike Bets Retreat

The UK 10-year gilt yield eased to 5.38%, retreating from recent 19-year highs, as the oil price rally paused and an in-line UK inflation report prompted traders to scale back expectations for further Bank of England rate hikes. UK annual inflation accelerated to 3.1% in August, as widely expected, from 2.9% in July, largely reflecting higher fuel costs. Core CPI was unchanged at 2.6%, while services inflation, a key focus for the Bank of England, came in at 3.4%, slightly below the 3.5% expected. No change to UK interest rates is expected at Thursday's meeting, while a hike remains broadly priced for November, albeit with less conviction. Further out, markets have also scaled back expectations for hikes through the end of next year, with four now priced comfortably versus five previously. Elsewhere, oil prices eased from four-month highs following a surprise rise in US crude inventories, despite widening supply disruptions across the Middle East.

The UK 10-year gilt yield climbed toward 5.4%, hovering near its highest level since August 2007, as surging oil prices and Britain’s vulnerability to energy shocks drove investors to increase bets on further Bank of England rate hikes ahead of Thursday’s policy meeting. BoE Governor Andrew Bailey has pushed back against expectations of another imminent hike, but rising energy costs have clouded the inflation outlook, with oil trading well above $100 a barrel amid renewed Middle East hostilities. Goldman Sachs expects the BoE to hold Bank Rate at 3.75% on Thursday, before delivering a 25-bp hike in November as inflation remains elevated and growth holds up. Markets are meanwhile pricing in four BoE hikes by mid-2027. In the US, the Federal Reserve is expected to raise rates by 25 bps on Wednesday, with inflation concerns likely to keep the focus on the outlook for further policy tightening.

The UK 10-year gilt yield dipped toward 5.3% as the energy price rally paused and investors digested key data ahead of next week’s policy meetings in the UK and US. Yields nevertheless remained close to 19-year highs, while the 30-year yield hovered near 6%, a level last seen in 1998. UK GDP grew 0.4% month-on-month in July, beating forecasts, while growth over the three months to July also held at 0.4%. Markets expect the BoE to leave rates unchanged next week after Governor Andrew Bailey said future decisions would depend on economic and geopolitical developments, pushing back against the view that another hike is inevitable. Still, markets are fully pricing four BoE rate increases by mid-2027 as elevated oil prices continue to fuel inflation concerns. In the US, the dollar remained supported by growing expectations of a Federal Reserve rate hike next Wednesday following stronger-than-expected core inflation data and signs of a resilient labor market.