UK borrowing costs jump by most since May as Middle East conflict deepens

LONDON, March 2 (Reuters) - British government bond yields ​leapt on Monday and investors sharply cut their expectations for Bank of England interest rate cuts as the conflict in the ​Middle ‌East raised concerns globally over higher oil prices, inflation and market volatility.

Yields on the new two-year benchmark gilt , which are ⁠sensitive to the outlook for BoE interest rates, rose more ⁠than 16 basis points on the ​day to 3.693% at 1558 GMT, the highest in nearly three weeks.

At 1630 GMT, the gilt was up 11 bps on the day, in line with a similar move on the two-year U.S. Treasury and representing the ​biggest daily ‌fall in the price of a two-year benchmark gilt since May 2025.

Longer-dated gilt yields also surged, with 10-year gilt yields up by 7 basis points on the day to 4.37%, and 30-year yields rising by around 6 bps to 5.08%.

"Fears that a large spike in energy prices will cause another wave of inflation ​around the world are the latest macro risk emanating from the conflict," Kathleen Brooks, research director at XTB, ‌said.

Oil prices rose as much as 13% on Monday, touching more than $82 a barrel for Brent crude following joint U.S.-Israeli strikes on Iran before finishing ‌the day at around $78.

BoE policymaker Alan Taylor said on Monday that it was too soon to tell how the conflict in the Middle East would impact Britain's economy, adding that the outlook was fluid.

But Britain's ​inflation has been the highest among big, rich economies for a while, and for some members on the BoE Monetary Policy ‌Committee underlying inflation remains too high to reduce borrowing costs.

Investors saw a roughly 50% chance that the BoE will cut its Bank Rate to 3.5% from 3.75% later this month, down sharply from a 78% probability on ⁠Friday. Interest ⁠rate futures were no longer pricing in two quarter-point cuts by the ‌end of 2026.

Tuesday will also see finance minister Rachel Reeves present updated growth and borrowing forecasts and the UK Debt Management Office ​will publish its 2026/27 ​issuance plans.

Primary dealers polled by Reuters expect gross gilt issuance to fall ‌for the first time in four years, dropping to 245 billion pounds ($328 billion) in 2026/27 from 304 billion pounds in 2025/26, and for the DMO to continue to focus on short- and medium-dated gilts. ($1 = 0.7474 pounds) (Reporting by Suban Abdulla; Editing by William Schomberg, David Milliken and Alison Williams)