UK Gilt Yields Rise as BoE Turns More Hawkish

UK 10-year gilt yields rose to 5.4%, a near two-decade high, as investors digested a series of comments from Bank of England policymakers for further clues on the monetary policy outlook. BoE Governor Andrew Bailey said persistently high energy prices would make it harder for the central bank to keep rates on hold, while MPC members Sarah Breeden and Clare Lombardelli also signaled they were moving closer to supporting a rate hike as rising energy prices increased the risk of inflation remaining above target. The warnings come at a challenging time for Prime Minister Andy Burnham and Finance Minister John Healey, who are seeking to ease cost-of-living pressures ahead of the October 28 budget. Markets are pricing in roughly an 80% chance of a BoE rate hike in November, with slightly more than four 25bp increases priced into the curve over the next year. In the US, investors have likewise increased bets on further Federal Reserve rate hikes following hawkish comments from policymakers.

UK 10-year gilt yields eased slightly to 5.35% as oil prices retreated from a two-day rally following reports that the US and Iran were considering a phased agreement that could reopen the Strait of Hormuz. Despite the pullback, gilt yields remain close to multi-year highs as the US-Iran conflict and elevated energy prices continue to fuel concerns over renewed inflationary pressures. Markets continue to price in a solid probability of a 25-basis-point Bank of England rate hike in November. Earlier this week, BoE Deputy Governor Sarah Breeden said it could become “increasingly appropriate” to respond to rising inflation risks by raising interest rates. Deputy Governor Clare Lombardelli likewise said rates may need to rise if energy prices remain elevated, while MPC member Swati Dhingra said inflation expectations were not yet a source of concern. In the US, investors also increased bets on further Federal Reserve rate hikes following hawkish comments from policymakers.

UK 10-year gilt yields were little changed around 5.35%, remaining close to the 19-year highs reached earlier this month, as elevated oil prices and comments from Bank of England policymakers kept monetary policy in focus. Brent extended its recent gains as heightened Middle East tensions clouded prospects for a diplomatic resolution to the US-Iran war. BoE Deputy Governor Clare Lombardelli said rates may need to rise if energy prices remain elevated, unless there is clear evidence of a weaker economy. Meanwhile, MPC member Swati Dhingra said inflation expectations were not yet a source of concern. The latest PMI showed UK business activity continued to expand in September, although growth slowed slightly and fell short of expectations. Markets nevertheless continue to price in a solid chance of a 25-basis-point BoE rate hike in November. In the US, investors also increased bets on further Fed rate hikes following hawkish comments from policymakers and stronger-than-expected PMI data.