Investors have priced in three interest rate hikes for the UK over the next two years, driven by a global bond market rout that has sent UK gilt yields soaring. Two-year gilt yields, which indicate short-term interest rate expectations, have jumped over 4.5 per cent.
The Bank of England has set interest rates at 3.75 per cent. However, a cautious tone from previous Monetary Policy Committee meetings has led analysts to believe borrowing costs could rise due to a prolonged Iran war. The MPC warned in August that it would likely raise interest rates if a conflict re-emerges between Iran and the US.
City analysts attribute higher gilt yields in the UK to the country's vulnerability to inflation shocks. Brent crude oil prices are around $95 per barrel, and European gas prices have reached a three-year high, increasing concerns that the UK will experience higher price rises than previously anticipated.
AJ Bell analysts noted that investors are pricing in a first interest rate hike in November, a second in February, and a third in June, which would take rates to approximately 4.5 per cent. RBC Capital Markets analysts expressed doubt that current interest rate pricing would be realised, though they acknowledged risks for "further weakness."