UK CPI fell to 2.5% but a 3% oil spike drove gilt yields higher as BoE rate-cut expectations faded; the surge in Brent crude revived inflation fears and underscored bond market vulnerability to energy costs.
Brent crude surged 3% to $85/bbl, lifted by supply concerns and robust demand data. The move intensified inflation fears, weighing on bonds globally.
A combination of unexpected supply outages and above-consensus demand figures pushed Brent crude up 3% to $85/bbl. This reignited inflation concerns across financial markets.
Higher oil prices raise input costs and consumer prices, which can force the BoE to keep interest rates higher for longer. This depresses bond prices and lifts yields, as seen in the gilt sell-off.
UK inflation dropped to 2.5%, below the 2.7% forecast, but gilt prices failed to rally as a 3% surge in Brent crude stoked inflation expectations and kept BoE rate-cut bets in check. The 10-year gilt yield climbed 8bp to 4.35%.
The drop in UK inflation was offset by a surge in oil prices, which revived fears of future price pressures. Markets scaled back BoE rate cut expectations as higher energy costs threaten to feed through to broader inflation, keeping gilt yields elevated.
Yields may continue to climb if oil prices persist above $85, but a sharp reversal in crude or a dovish shift from the BoE could quickly reverse the move. The 10-year gilt yield faces resistance at 4.50%.
UK inflation eased to 2.5% y/y in July, the third consecutive miss, but gilts found no relief as Brent crude surged 3% to $85/bbl. The oil rally stoked inflation fears and kept Bank of England rate-cut bets in check, sending 10-year gilt yields 8bps higher to 4.35%. The move highlights the bond market’s sensitivity to energy-driven price risks.
The July CPI report showed UK inflation eased to 2.5% year-on-year, below the expected 2.7%. This was the third consecutive month of softer prints, but market reaction was muted.
A simultaneous 3% rally in oil prices overshadowed the inflation miss. Higher energy costs threaten to push inflation back up, preventing the BoE from signaling rate cuts, which kept gilt yields elevated.