Gilt yield spike dampens hopes of early Bank of England rate cuts

Gilt yields moved sharply higher on Monday, reshaping market expectations for the Bank of England’s next moves and adding fresh pressure to mortgage funding costs.

The five-year gilt yield led the move, rising by around 19 basis points on the day, with the two-year up about 12 basis points and the 10-year roughly 14 basis points higher. That shift has pushed wholesale funding costs back up, with direct implications for fixed-rate mortgage pricing.

The repricing comes ahead of the next Monetary Policy Committee meeting on March 19. According to Nicholas Mendes (pictured top), mortgage technical manager at London broker John Charcol, the backdrop remains volatile, with scope for either improvement or further deterioration in the coming weeks. “Either way, a near-term cut is now clearly less likely than it was even a week ago,” Mendes said.

At the heart of the shift is concern over energy markets, driven by the unfolding conflict and the risk of supply disruption. Mendes stressed that even if the military tensions were to ease relatively quickly, the inflation backdrop would not simply revert to where it stood beforehand. The medium-term concern is not only higher oil and gas prices, but the possibility of impaired supply and the broader economic effects that follow.

“The bigger geopolitical and economic risk is supply disruption, not simply the initial spike in prices,” Mendes pointed out. “How long the conflict lasts, and how long supply chains are impaired, will be a major driver of the macro outlook.”

There is also a sense that both sides have adjusted their tactics after observing Russia’s invasion of Ukraine, particularly in targeting energy infrastructure. That raises the prospect of more severe global spillovers, given how quickly shocks in energy markets can transmit through prices and trade flows.

One immediate concern is liquefied natural gas (LNG). Qatar has reportedly halted some LNG production after facilities came under attack. While about 80% of Qatari LNG exports normally go to Asia, any significant interruption is likely to leave Asian buyers seeking replacement cargoes. LNG output can be taken offline quickly but is slower to bring back, with restarts typically taking about a month, suggesting that the disruption is unlikely to be confined to a short period of volatility.

US exports are more focused on Europe, but the flexibility of LNG trade means flows could be redirected if Asian demand surges and buyers are prepared to pay higher prices. In practice, this could transmit higher prices to end markets almost immediately, even before new supply is secured.

Europe, and by extension the UK, remains vulnerable on gas. Storage is limited and current stock levels are relatively low, leaving less of a buffer in the event of a sustained supply shock. Norway remains an important supplier to both the UK and continental Europe, with flows into Europe partly routed via the UK, which provides some support. Nonetheless, the region enters this period with less protection than policymakers would like.

Investment bank Panmure Liberum’s estimates suggest that if oil and gas prices remain around current levels for the rest of the year, the impact on UK inflation could be in the region of 0.3 to 0.4 percentage points. On its own, that uplift would not be enough to derail the economy, but it could complicate the Bank of England’s path to cutting rates and keep lenders cautious about passing on lower funding costs.

There is also a geopolitical dimension, Mendes said. Higher energy prices could benefit Russia, particularly if governments become less willing to enforce sanctions as aggressively in a tight supply environment. “It will be worth watching whether enforcement action against “shadow” tanker activity stays as firm if supply tightens,” Mendes added.

For mortgage borrowers, the immediate implications are already becoming apparent. Mendes pointed out that some recent rate reductions, such as Santander’s latest cuts, were likely agreed before the latest spike in gilt yields. That leaves the risk that lenders turn more defensive if volatility persists.

In that environment, rate adjustments may not mirror changes in funding costs one-for-one. Lenders can widen margins when visibility worsens, meaning product rates might rise by more than moves in the underlying swap or gilt curve would strictly imply.

Against that backdrop, Mendes warned borrowers not to delay decisions unnecessarily. “So, the message for anyone needing a new rate, particularly those coming off a fix, is straightforward: don’t sit on it,” he said. “If you’re in window, secure a new fix as soon as you can. A broker can still help you lock something in and keep options open if pricing improves again before completion.” 

For intermediaries, the current conditions underline the importance of clear communication with clients about volatility in funding markets, the risks around timing, and the value of securing suitable products early while retaining flexibility where possible.