Energy Shock Puts Bank of England Under Pressure to Raise Rates

The Bank of England is under intensifying pressure to lift interest rates as a global bond sell-off coincides with a spike in energy prices tied to the Iran conflict. Investors warned Threadneedle Street that failing to act could undermine the Bank’s credibility as gilt yields surge and markets price in multiple rate increases.

By AI NewsroomPublished about 13 hours agoUpdated about 13 hours ago0 views

Why It Matters

Rising oil and gas prices risk feeding through into broader inflation at a time when bond markets are demanding higher yields; the BoE’s decision will influence borrowing costs, gilt market stability and the pound’s performance. Markets and some economists say a prompt rate response is necessary to prevent inflation expectations becoming entrenched.

Key Facts

Source: City AM
US 10-year Treasury yield: Above 5% for the first time since 2007
30-year gilt yield: Near 6%, highest since 1997 (as of Tuesday)
Brent crude price: $107 per barrel, highest since May
Market-implied Bank hikes: As many as four rate rises priced in over next 12 months (shorter-term gilts)

The Bank of England is facing heightened calls to raise interest rates as a global rout in government bonds has coincided with a fresh surge in energy costs linked to the Iran war. Investors told Threadneedle Street it is vital to act to curb inflation before the energy shock spreads through the economy, warning that delay could damage the Bank’s credibility.

Developed-world sovereign debt has been swept up in an aggressive sell-off, with the US 10-year Treasury yield breaking above 5% for the first time since 2007. UK gilts have been particularly hard hit: traders dumped both long- and short-dated issues, pushing the 30-year gilt yield to near 6% — its highest level since 1997 — and leaving shorter-term gilts implying that the Bank might raise rates up to four times in the coming year.

The jump in energy markets has been a key driver of concern. Saudi Arabia shut down a major pipeline after a drone attack, contributing to Brent crude reaching about $107 a barrel and European natural gas climbing to levels not seen since the initial fallout from Russia’s invasion of Ukraine. Economists warn those higher costs could be passed on to consumers even with slack in Britain’s labour market, eroding real returns for bondholders and adding to inflationary pressure.

Views are divided on the Bank’s correct response. Some economists, including Andrew Wishart of Berenberg, argue a small rate rise now would protect the Bank’s credibility and the pound, saying the cost of a 25bp increase is modest compared with the risks of inaction. Others contend the Monetary Policy Committee should hold rates for a sixth meeting, noting limited evidence that the shock is becoming embedded in wages and prices. The European Central Bank moved to tighten policy earlier in the week — its second hike since 2023 — and the US Federal Reserve was widely expected to follow when it met on Wednesday. (Source: City AM)