UK Gilt Yields Surge on Inflation Fears and Rate Hike Expectations

UK 10-year gilt yields rose above 5% in July, increasing by 28 basis points over the month. This rise was fueled by concerns that the Middle East conflict could reignite inflation and prompt further tightening from the Bank of England.

The escalation of oil prices contributed to these concerns, surging by 20%. Despite this, the BoE voted 6-3 to keep interest rates unchanged in July, with three policymakers backing a rate hike. However, Governor Andrew Bailey downplayed the prospect of an imminent tightening cycle.

Market expectations now point to one rate hike by year-end. This is despite some officials suggesting that rate cuts could return to the agenda if the Iran conflict subsides. The Federal Reserve left interest rates unchanged in the US this week, with investors anticipating two rate hikes by June 2027 due to ongoing US-Iran hostilities.