What to make of the latest surge in Gilt yields

The latest surge in Gilt yields mainly reflects investors’ assessment of how the conflict in the Middle East will affect inflation and monetary policy in the UK rather than having much to do with today’s fiscal statement. But we doubt inflation expectations in the UK will keep rising sharply, even if energy prices do. That’s because the Bank of England would presumably become less inclined to consider cutting its policy rate further, especially to our year-end forecast of 3%. Nonetheless, assuming energy prices drop back, we think that Gilt yields will do likewise as the policy rate undershoots investors’ expectations.