UK 10-year gilt yields rose above 5%, approaching levels last seen in 2008, as stalled negotiations over the war in Iran and surging oil prices heightened inflation fears and led investors to anticipate further central bank tightening. Brent crude hit a four-year high following reports that US President Trump had ordered preparations for a prolonged naval blockade of the Strait of Hormuz to increase pressure on Iran. In response, Iranian forces threatened “practical and unprecedented military action” if the blockade continues.
The Bank of England is expected to leave interest rates unchanged this Thursday, reflecting caution amid the escalating Middle East crisis, although markets are still pricing in two quarter-point rate increases for 2026. Adding to the pressure, Lloyds has revised its UK economic outlook, lifting its 2026 inflation forecast to 3.4% from 2.6% and cutting its GDP growth projection to 0.5% from 1.2%. The bank no longer expects any BoE rate cuts this year, having previously forecast two, and now sees unemployment peaking at 5.6% in the fourth quarter.
