The UK 10-year gilt yield slipped back below 4.4% on Wednesday, retracing some of the sharp gains seen over the previous two sessions on concerns that the Middle East conflict could fuel higher inflation. On Tuesday, the yield rose by as much as 22 basis points intraday, closing the session 9 basis points higher. Climbing oil and gas prices have heightened global inflation risks and led investors to pare back expectations for Bank of England rate cuts. Markets now assign only around a 20% probability to a cut this month, down from 75% a week earlier, and anticipate just a single 25-basis-point reduction in interest rates over the course of the year.
At the same time, investors digested more cautious economic projections from Chancellor Rachel Reeves. The Office for Budget Responsibility lowered its UK growth forecast for 2026 to 1.1%, from 1.4% in its November outlook, and this downgrade does not yet factor in any additional energy price shocks. However, the OBR raised its forecasts for 2027 and 2028 to 1.6% in each year, alongside projections for reduced government borrowing and relatively subdued inflation.
