The cost of borrowing in the UK rose Tuesday as oil prices climbed past $100 a barrel, renewing concerns about inflation and higher interest rates.
Yields on 10-year gilts—UK government bonds—exceeded 5.1%, a level last seen during the 2008 financial crisis. The increase followed five consecutive days of gains for Brent crude, which last traded above $100 in May.
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Higher borrowing costs will raise the expense of servicing the UK’s national debt, making budget balancing harder for Prime Minister Andy Burnham and Chancellor John Healey. Their spending pledges, including subsidies for energy bills, bus fares, and business rates, have already drawn criticism.
Households will face pressure from multiple angles. Mortgage rates have started rising in anticipation of Bank of England rate hikes, while fuel prices at pumps climb sharply.
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Figures from the RAC show diesel prices jumped 8p per liter in the past fortnight, with petrol up 5p in two-and-a-half weeks. Simon Williams, the RAC’s head of policy, described the increases as rapid.
Oil’s surge has raised doubts about whether inflation’s recent decline will last. Markets now expect the Bank of England to raise interest rates twice before year’s end, tightening financial conditions further.
Global bond sell-off spreads
The UK bond market turmoil reflected a wider global sell-off. In Germany, 10-year bond yields reached a 15-year high, mirroring inflation and monetary policy concerns.
The latest oil price rally stemmed from escalating Middle East tensions. Yemen’s Houthi rebels claimed responsibility for attacks on two Saudi oil tankers, expanding the conflict beyond the Strait of Hormuz to the Bab el-Mandeb Strait, another critical waterway.
Goldman Sachs analysts warned Brent crude could exceed $120 a barrel in the fourth quarter if disruptions continue. The bank predicts an average price of $100 next year if the Strait of Hormuz remains unstable, with even higher potential if the Bab el-Mandeb faces prolonged issues.
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The conflict has driven oil prices on a volatile path since late February. After spiking to $126 in April following initial hostilities, prices fell to $70 earlier this month amid a fragile ceasefire. Since the deal collapsed, Brent has rebounded, closing at $101 Tuesday.
Stock markets also fell, with the FTSE 100 dropping 0.7% to 10,639.17. Susannah Streeter, chief investment strategist at Wealth Club, said investors were growing uneasy about the energy crisis. Escalating Middle East tensions increase the risk of deeper supply disruptions and threats to key energy routes, she noted. Iran’s involvement appears to have drawn the Houthis back into the conflict.
The attacks, if confirmed, would mark the first since the Houthis announced a maritime embargo against Saudi Arabia, potentially opening another front. Uncertainty has left markets uneasy, with no clear resolution in sight.
Higher oil prices and rising bond yields suggest the economic outlook remains uncertain. The Bank of England’s next interest rate decision will be critical as policymakers balance inflation risks against potential damage to growth.
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