UK borrowing costs fall despite inflation rise

By the Editorial Team · Thursday, September 17, 2026

UK government bond yields fell slightly after hitting near two-decade highs earlier in the week, amid rising inflation that reached 3.1% in August, driven partly by higher fuel costs. This easing lowered market expectations for immediate interest rate hikes, but persistent energy price pressures and inflation forecasts suggest the Bank of England may still need to tighten monetary policy in the coming months.

UK government borrowing costs eased slightly on Thursday after reaching near two-decade highs earlier in the week, despite official data showing inflation rising to a five-month peak. Yields on ten-year government bonds, known as gilts, dropped to around 5.28%, down from a 19-year high close to 5.44% recorded earlier this week.

Market expectations for the Bank of England’s monetary policy decisions have shifted accordingly. Investors now assign just a 20% probability to a rate increase in the upcoming policy meeting, down from a higher likelihood previously. While the market still anticipates up to four interest rate hikes by the end of next year, this forecast has been reduced from five.

The latest figures from the Office for National Statistics revealed that headline inflation in the UK rose to 3.1% in August, driven in part by surging fuel costs linked to geopolitical tensions in Iran. However, core inflation—which excludes volatile food and energy prices—remained steady at 2.6%.

Despite the temporary easing in gilt yields and reduced immediate rate hike expectations, many economists warn that inflationary pressures may intensify. With gas and oil prices remaining elevated, energy costs continue to exert upward pressure on overall inflation. Forecasts indicate that household energy bills, currently at a three-year high, could jump by as much as 25% in January when the next Ofgem price cap adjustment takes effect.

Economists at Nomura noted that inflation is likely to rise in the coming months, which could increase the impetus for the Bank of England to tighten monetary policy. Sanjay Raja, chief UK economist at Deutsche Bank, highlighted uncertainties surrounding inflation’s trajectory. He cited factors such as the anticipated Ofgem price cap increase exceeding 20% early next year and expected rises in food prices driven by recent heatwaves, drought conditions, and El Niño weather patterns.

Raja commented that achieving the Bank of England’s inflation target of 2% has become increasingly challenging under these conditions. The evolving inflation outlook leaves policymakers navigating a complex environment as they balance the risks of inflation resurgence against economic growth considerations.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.