Gilt Yields Surge as Inflation Risks Raise Rate-Hike Expectations

UK 10-year gilt yields rose to 5.4%, their highest level in nearly two decades, as investors priced in a more hawkish Bank of England policy stance amid renewed inflation pressures. Oil prices climbed after President Donald Trump rejected an Iranian proposal to reopen the Strait of Hormuz and end the conflict in the Middle East. BoE Deputy Governor Dave Ramsden said Monday he would support rate hikes if “upside pressures” on inflation persist, echoing recent warnings from Governor Andrew Bailey and other policymakers that higher energy prices could fuel a wage-price spiral. The MPC recently voted to hold rates at 3.75%, while warning inflation could peak around 4%. Markets are now pricing in an 85% probability of a 25bp rate hike in November, with roughly four increases priced in by the middle of next year. Meanwhile, Chancellor John Healey stressed the need for fiscal discipline in a major speech ahead of next month’s budget, citing the rising cost of servicing the UK’s debt.

UK 10-year gilt yields rose above 5.4%, their highest level in nearly two decades, as oil prices climbed amid fading hopes of progress in US-Iran talks. Iran said it would not soften its conditions for reopening the Strait of Hormuz, after President Trump rejected its proposal. Trump also said Iran had “overplayed its hand” and that negotiations could resume this week. Markets increased bets on tighter Bank of England policy, pricing in an over 80% chance of a rate hike in November. BoE Governor Andrew Bailey said last week that persistently high energy prices would make it harder to keep rates on hold, while MPC members Sarah Breeden and Clare Lombardelli also signaled growing support for a hike. Meanwhile, Chancellor John Healey is set to address the Labour Party conference ahead of next month’s Budget, with potential measures beginning to emerge, including a possible revival of the Help to Buy scheme for first-time buyers.

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.