By Miriam Mukuru
Ten-year gilt yields rose to their highest level in 14 months after the Bank of England kept interest rates unchanged but opened the door to possible rate increases in coming months if energy prices continue to rise.
"[The BOE] stands ready to act as necessary to ensure that CPI inflation remains on track to meet the 2% target in the medium term," the central bank said in a statement accompanying the unanimous decision to leave rates at 3.75% on Thursday.
Yields on ten-year gilts jumped more than 10 basis points to 4.910%, their highest level since January 2025, Tradeweb data showed.
Energy prices have surged due to the war in the Middle East, raising concerns among central bankers about the potential for a sharp rise in inflation.
Following the BOE's announcement, U.K. money markets priced in a 61% chance of a 25 basis-point rate increase as early as April, and fully priced a rate rise in June, followed by another in September, LSEG data showed. Prior to the U.S.-Israeli attacks on Iran, markets had anticipated two rate cuts this year, with a high potential for one at Thursday's meeting.
"Without question, the balance of risks has shifted decisively towards hikes, rather than cuts, with markets bracing for the possibility of a rate increase as soon as the next meeting in April," Matthew Ryan, head of market strategy at financial services firm Ebury, said in a note.
The U.K. is particularly vulnerable to the surge in global oil prices "given the liberalisation of U.K. energy markets, the push away from domestic oil production and a limited storage capacity," he said.
Oil prices surged on Thursday after attacks on energy facilities in the Gulf stoked fears of a full-blown energy crisis, with Brent crude briefly reaching $119 per barrel.
Some analysts said that the jump in market expectations for BOE rate increases could be stretched.
"The scale of the move looks to be overdone," Pierre Roke, analyst at Validus Risk Management, wrote in a note.
"Market rate expectations have shifted aggressively--leaving room for a near-term correction and continued volatility."
Still, bond markets are nervous and need reassurance that monetary authorities are prepared to raise interest rates sooner rather than later, Franklin Templeton Institute's global investment strategist, Michael Browne, said in a note.
"Investors should be re-assured that [the BOE] will act, even though a rate rise would be bad news for the economy."
Write to Miriam Mukuru at miriam.mukuru@wsj.com
(END) Dow Jones Newswires
March 19, 2026 10:58 ET (14:58 GMT)
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