UK 10-year gilt yields were little changed around 5.35%, holding near the 19-year highs reached earlier this month, as elevated oil prices and recent Bank of England commentary kept monetary policy in sharp focus. Brent crude extended its latest gains amid rising tensions in the Middle East, which have dimmed hopes for a diplomatic resolution to the US–Iran conflict.
BoE Deputy Governor Clare Lombardelli indicated that interest rates may need to rise further if energy prices remain high, unless there is clear evidence of a weakening economy. In contrast, MPC member Swati Dhingra noted that inflation expectations are not yet a source of concern.
The latest PMI data showed that UK business activity continued to grow in September, though at a slightly slower pace than previously and below market expectations. Even so, markets still assign a meaningful probability to a 25-basis-point BoE rate increase in November. In the US, investors have also raised their expectations for additional Federal Reserve rate hikes, following hawkish remarks from policymakers and stronger-than-anticipated PMI readings.
