Global factors are primarily driving the steeper UK yield curve, according to recent reports. Despite this, there’s an expectation that interest rates will eventually decline. Current risks to UK inflation are related to supply-side concerns that are impacting the economy. It is recommended to not place too much emphasis on 30-year gilt rates, even though they just hit their highest yield since 1998.

Recalibration of Rate Expectations

Another view suggests the neutral interest rate could be in the upper half of the 2-4% range. This points to a potential adjustment in interest rate expectations as the economy continues to evolve. There is a noticeable gap between what the Bank of England is saying and what the bond market is showing. While the bank claims rates will decrease, the 30-year gilt yield recently reached its highest level since 1998. This indicates that the market is worried about long-term inflation and government debt. This scenario creates a chance to profit from a steeper yield curve, betting that long-term yields will rise while short-term rates stay low due to the Bank of England’s cautious stance. Recent data from the Office for National Statistics in August 2025 showed core inflation stuck at 4.1%, and the Debt Management Office’s heavy issuance for the year will add more strain. The quick downturn during the gilt market crisis in 2022 is a reminder that the market remembers these events.

Possibility of a Higher Neutral Rate

The conflict between the central bank’s guidance and market expectations suggests increased volatility is on the horizon. We should think about buying options on SONIA futures, as this allows us to profit from significant price changes without needing to choose a specific direction. The UK’s volatility index rose 15% last week, but it’s still below the extreme levels seen in 2022, indicating more potential movement ahead. We shouldn’t overlook the chance that the bank’s dovish approach might be incorrect, and it may have to adjust to the market’s expectations. With key figures suggesting the neutral rate could be around 3-4%, the current policy might not be strict enough to control inflation. The swap market reflects this doubt, with only one 25 basis point rate cut projected by mid-2026. Create your live VT Markets account and start trading now.

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