Societe Generale’s UK team has reported a sharp selloff in 10-year UK government bonds (gilts), with yields reaching 5%, marking their highest level since 2008. This surge in yields was attributed to market expectations of further tightening by the Bank of England (BoE) in response to escalating attacks on energy infrastructure in the Middle East, which have contributed to an energy shock in the UK economy [1].
Despite the market reaction, Societe Generale views this as an overreaction and now forecasts that the BoE's Monetary Policy Committee (MPC) will remain on hold through 2026, refraining from further rate hikes due to the ongoing energy shock [1]. The upcoming UK Purchasing Managers’ Index (PMI) and inflation data are highlighted as crucial for reassessing growth and price pressures, with the March PMIs expected to provide the first insight into the impact of the energy shock [1].
The BoE has revised its inflation forecast for March, now expecting a year-on-year rate of 3.5%, up from its previous estimate of 3.1%. This increase is primarily driven by higher fuel prices [1]. Additionally, MPC speakers, including Greene, Taylor, and Breeden, may address the market's aggressive pricing, suggesting that it may have gone too far [1].
CONCLUSION
Societe Generale anticipates the Bank of England will keep rates unchanged through 2026, despite a sharp selloff in gilts and rising inflation expectations driven by energy shocks. The market's reaction is seen as excessive, with upcoming PMI and inflation data set to play a pivotal role in shaping future policy outlook. Investors should closely monitor these data releases and MPC commentary for further guidance.