UK 10-year gilt yields slipped toward 4.75%, their lowest level since mid-April, as traders pared back expectations for further Bank of England rate hikes in response to softer-than-expected inflation data and continued weakness in oil prices.
Headline CPI was unchanged at 2.8% year-on-year in May, missing economists’ forecasts for an increase to 3%. By contrast, services inflation accelerated, rising to 3.7% from 3.2% in April and coming in above the 3.6% consensus. Core inflation also moved higher, but by less than anticipated, edging up to 2.6% from 2.5%.
Oil prices fell to fresh three-month lows amid mounting expectations that the US and Iran could reach an agreement this week. Markets are now pricing in just 25 basis points of rate hikes for 2026, effectively a single increase by December.
Prior to the Iran-related tensions, the Bank of England had been expected to begin cutting rates this year. However, the subsequent spike in crude prices—still well above pre-conflict levels of around $65 per barrel—forced a rethink and underlined the UK economy’s vulnerability to energy-price shocks.
