The Bank of England published analysis of what drove UK long-term interest rates in 2025, concluding that the rise through the first three quarters and the subsequent fall back in the fourth quarter were primarily driven by changes in term premia, rather than shifts in expected future short rates or inflation expectations. It notes that while UK long rates ended 2025 close to where they started, they remained near multi-year highs and high relative to peers. From early January to early September 2025, the 10-year gilt yield rose around 20 basis points to 4.8% and the 30-year rose around 50 basis points to 5.7%, before reversing between September and end-2025 to 4.5% (10-year) and 5.2% (30-year). Decompositions of five-year, five-year forward gilt yields point to real term premia as the key driver, with real policy rate expectations and inflation expectations playing a small role and model-based estimates suggesting inflation risk premia fell over the year. Global factors were presented as the main source of higher term premia, including geopolitical uncertainty and concerns about fiscal sustainability amid elevated issuance, with UK-specific gilt supply and demand dynamics amplifying moves, including reduced structural demand from liability-driven investment strategies as defined benefit pension schemes’ solvency improved. The analysis also links the Q4 easing in term premia to UK supply and fiscal developments, including the UK Debt Management Office’s cancellation of a long-dated gilt auction in early September and a November Budget plan to issue a smaller share of long-maturity gilts, alongside the Monetary Policy Committee’s quantitative tightening stock reduction pace of GBP 70 billion for October 2025 to September 2026 and the Bank’s intention to sell fewer long-maturity sector gilts relative to other maturities.
Bank of England 2026-01-23
Bank of England research attributes 2025 UK long-term rate swings mainly to higher real term premia
The Bank of England's analysis of UK long-term interest rates in 2025 attributes the initial rise and subsequent fall to changes in term premia, influenced by global factors and UK-specific dynamics, rather than shifts in expected future short rates or inflation expectations. The study highlights geopolitical uncertainty, fiscal sustainability concerns, and UK fiscal developments, including the UK Debt Management Office's auction cancellation and the Monetary Policy Committee's quantitative tightening strategy, as key influences.