Two-year bond prices jumped to their highest level since 9 June, rising three basis points to around 3.999%, as markets priced in later rate cuts by the Bank of England. 

Sonia swap rates, which affect mortgage rates, lifted 4ps to 3.57% for 25-month terms, while five-year rates rose to 3.83%, also up 4bps. 

Markets are no longer pricing in another rate cut this year, with expectations having been pushed back to spring 2026, with many investors pointing to a cut in April next year. 

The moves come as investors continue to digest Wednesday’s official inflation reading, which rose to a higher-than-expected 3.8% in the year to July, an 18-month high, up from 3.6% in June. 

Air fares, food and fuel prices pushed the cost of living to its highest level since January 2024. 

This is well above the Bank of England 2% target, with the central bank forecasting inflation will hit 4% next month before beginning to fall.  

Money markets are putting a 57% probability that Bank rate will remain at the current 4% at the Monetary Policy Committee rate-setting final meeting on 18 December. Two more MPC meetings are scheduled before that on 18 September and 6 November. 

Earlier this month, the MPC voted on its third quarter-point rate cut this year and the fifth since last August, but the narrow 5-to-4 vote of the nine-member committee saw dissenters voice concerns about rising inflation and whether wages are easing quickly enough. 

ING developed markets economist James Smith said a November rate cut was “more likely than not,” but added that it was “not a particularly high conviction call right now given the very evident division on the rate-setting committee.” 

RBC Capital Markets senior UK economist Cathal Kennedy added that a 25-basis-point cut in November was still on the table — but only if inflation remains in line with central bank forecasts and the labour market continues to ease. 

But Deutsche Bank chief UK economist Sanjay Raja argued the MPC may have to show more “patience” on rate cuts in the final few months of the year, forecasting that inflation will not return to the Bank of England 2% target until “around 2027”. 

Raja said: “Developments in the labour market point to wage disinflation and weaker price pass-through over the next year or so.  

“But these effects will take time to filter through into the price data.  

“The MPC may look for more patience going forward as it grapples with an uncomfortable trade-off — high near-term price momentum versus sluggish labour market data.”