UK Gilt Yields Ease Ahead of BoE Decision

UK 10-year gilt yields fell back to around 5.3% as oil prices declined for a second consecutive session, with investors also digesting yesterday’s Federal Reserve rate hike ahead of the Bank of England’s closely watched policy decision. Brent crude is trading around $105 a barrel after Saudi Arabia said it plans to restore roughly half the capacity of its damaged East-West pipeline within days. The Middle East outlook remains uncertain, however, keeping oil prices elevated and adding to the challenge for central banks as they seek to contain inflation without putting excessive pressure on economic activity. The BoE is widely expected to leave rates unchanged in a close decision, but markets will be watching for clues on the future policy path. In the US, the Fed raised rates by 25 basis points, the first increase since July 2023, and signaled another hike later this year amid persistent inflation pressures.

The UK 10-year gilt yield eased below 5.35%, 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.