UK 10-year gilt yields slipped to 5.35% as oil prices pulled back from a two-session rally, following reports that the US and Iran were exploring a phased agreement that could reopen the Strait of Hormuz. Despite the modest decline, gilt yields remain near multi-year highs, with the US–Iran confrontation and elevated energy prices continuing to stoke fears of renewed inflationary pressures. Markets are still pricing in a strong likelihood of a 25-basis-point Bank of England rate increase in November.
Earlier in the week, BoE Deputy Governor Sarah Breeden said it could become “increasingly appropriate” to respond to mounting inflation risks by raising interest rates. Deputy Governor Clare Lombardelli similarly warned that rates might need to rise if energy prices stay high, while MPC member Swati Dhingra noted that inflation expectations were not yet a cause for concern. In the US, investors have also raised their expectations for additional Federal Reserve rate hikes after a series of hawkish remarks from policymakers.
