--- title: "The situation in Iran reshapes interest rate expectations: the UK may raise interest rates four times this year, and UK bonds fall back to the \"Truss moment.\"" type: "News" locale: "en" url: "https://longbridge.com/en/news/280132650.md" description: "Affected by the escalation of the Middle East situation and fluctuations in international oil prices, the UK financial market has experienced severe turbulence, with rising inflation expectations. Traders expect the Bank of England to raise interest rates four times within 2026, each by 25 basis points. This expectation sharply contrasts with the rate cut predictions from a month ago, leading to the worst monthly performance for UK government bonds since September 2022, with a market value evaporation of £108 billion. The yield on two-year government bonds once surged to 4.1%, while the yield on ten-year government bonds broke through 5%, reaching a new high since 2008" datetime: "2026-03-23T09:25:05.000Z" locales: - [zh-CN](https://longbridge.com/zh-CN/news/280132650.md) - [en](https://longbridge.com/en/news/280132650.md) - [zh-HK](https://longbridge.com/zh-HK/news/280132650.md) --- > Supported Languages: [简体中文](https://longbridge.com/zh-CN/news/280132650.md) | [繁體中文](https://longbridge.com/zh-HK/news/280132650.md) # The situation in Iran reshapes interest rate expectations: the UK may raise interest rates four times this year, and UK bonds fall back to the "Truss moment." According to Zhitong Finance APP, affected by the escalating situation in the Middle East and the sharp fluctuations in international oil prices, the UK financial market experienced severe turbulence in March 2026. As the conflict between the United States, Israel, and Iran intensified, concerns about disruptions in the global energy supply chain peaked, directly raising inflation expectations in the UK. This sudden change in the macro environment forced investors to quickly revise their previously optimistic judgments that the Bank of England would begin a rate-cutting cycle. Current market pricing shows that traders have fully absorbed expectations of four rate hikes by the Bank of England in 2026, each by 25 basis points, which represents an extremely rare "policy reversal" compared to the two rate cuts widely predicted a month ago. Driven by these rate hike expectations, UK government bonds (Gilts) are experiencing the worst monthly performance since the "Liz Truss fiscal crisis" in September 2022. The index tracking traditional UK government bonds has fallen nearly 5% this month, marking the largest decline since the 8% drop in September 2022. This sell-off has caused the market value of the benchmark index to evaporate by £108 billion, with a closing market value of £1.63 trillion as of last Friday. On Monday, the downward trend continued, with the yield on the two-year government bonds, which are sensitive to interest rates, jumping 30 basis points in a single day, reaching above 4.1%, the highest level since February 2024. Meanwhile, the yield on the benchmark 10-year government bonds broke through the 5% mark, setting a new record since the 2008 global financial crisis. Although global bonds have been severely impacted since the US and Israel launched airstrikes on Iran, UK government bonds are among the worst performers. The UK's dependence on imported energy makes it particularly vulnerable to supply disruptions. Therefore, traders expect the Bank of England to raise interest rates up to four times this year, each by 25 basis points—completely opposite to the two rate cuts expected before the outbreak of the conflict—as officials vow to control inflation. For UK bond investors, this is a dramatic shift, as the same benchmark index achieved a 5% return in 2025—the best year since 2020. Many investors were still optimistic about UK bonds at the beginning of this year, viewing the decline in issuance and the widely anticipated monetary easing policy by the Bank of England as support for the market. However, the war has changed everything: soaring oil and gas prices could significantly push up inflation and force the Bank of England to tighten monetary policy. As investors close out their previously bullish positions, liquidity has remained poor, exacerbating the plight of bondholders this month. Rising borrowing costs make it more difficult for the government to adhere to its self-imposed fiscal rules. UK Prime Minister Keir Starmer will hold an emergency meeting on Monday with cabinet ministers and Bank of England Governor Andrew Bailey regarding the Iran crisis. Indeed, the nature of this month's sell-off is entirely different from the crisis in 2022. This month's yield surge has been primarily led by short-term bonds, as traders bet that the Bank of England will raise interest rates in the coming months. The yield on UK two-year government bonds has risen by more than one percentage point so far in March, with the yield curve flattening. In contrast, the plunge in 2022 was mainly driven by long-term bonds and inflation-linked bonds, which are favored by fixed-income pension funds. These funds employed highly leveraged strategies, triggering a wave of sell-offs as they rushed to meet margin calls The Bank of England ultimately had to resort to an emergency bond-buying program to curb this plunge. For bondholders who have suffered losses, this serves as another warning. The market is more susceptible to sudden sell-offs, partly because the country's investor base is shifting from stable domestic buyers to more price-sensitive institutions, such as hedge funds and foreign investors. In addition, the Bank of England's statements at recent policy meetings have further intensified market tightening expectations. Bank of England Governor Andrew Bailey explicitly warned that due to external energy price shocks, inflation in the UK could rise to around 3.5% by 2026, well above the official target of 2%. Although the central bank kept the benchmark interest rate unchanged at 3.75% in mid-March, its wording of being "prepared to take necessary action" was interpreted by analysts as a clear hawkish signal. Several authoritative institutions, including Morgan Stanley, pointed out that the current UK interest rate market is experiencing one of the most severe shocks in modern history, and government bond prices are likely to remain under pressure until the global energy crisis is fully resolved. Major international investment banks have also raised their forecasts for the UK's interest rate path, with market sentiment generally pessimistic. JPMorgan, in its latest report, predicts that the Bank of England may implement interest rate hikes as early as April and July this year to curb potential inflation spirals. Goldman Sachs has retracted its previous forecast for interest rate cuts in 2026, postponing it to 2027, and emphasized that if the situation in the Middle East leads to blockages in key waterways such as the Strait of Hormuz, the UK will face more prolonged monetary tightening pressures ### Related Stocks - [iShares Core UK Gilts UCITS ETF (IGLT.UK)](https://longbridge.com/en/quote/IGLT.UK.md) - [Vanguard UK Gilt UCITS ETF (VGOV.UK)](https://longbridge.com/en/quote/VGOV.UK.md) - [Lyxor FTSE 100 UCITS ETF (L100.UK)](https://longbridge.com/en/quote/L100.UK.md) - [HSBC FTSE 100 UCITS ETF (HUKX.UK)](https://longbridge.com/en/quote/HUKX.UK.md) ## Related News & Research - [J.P. 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