Risks of U.K. Rates Staying High for Longer Are Rising

what happened

Risks that U.K. interest rates will stay higher for longer than markets had expected are increasing, according to a note from Deutsche Bank analysts Maui Brennan and Sanjay Raja, reported by Market Talk. They link these risks to an ongoing disruption in energy supply.

The Bank of England is widely expected to raise rates next week, according to LSEG data cited by Market Talk. Markets also price in three further increases by July 2027, driven by worries about inflation.

The analysts stress that much depends on how long the energy shock lasts, how it spreads through the economy, and whether second-round effects appear.

why it matters

For markets, expectations of higher rates support the pound but weigh on British government bonds, since rising yields push their prices down. The next moves will depend on inflation data and on how long the energy shock lasts.

market impact

Pound: expectations of higher rates support the currency; gilts: pressure from rising yields

• ▲Pound sterling pressure up — expected higher Bank of England rates lift yields on sterling assets
• ▼UK government bonds (gilts) pressure down — higher expected rates push yields up and bond prices down

tags

instruments