UK May CPI stabilization triggers cooling rate hike expectations: UK bonds welcome five consecutive gains, with the 10-year yield hitting a two-month low.

Notice that, due to the stable inflation rate in the UK in May, the pressure on the Bank of England to raise interest rates has been eased, and UK government bonds have successfully extended their consecutive gains to the fifth trading day. The yield on the UK 10-year government bond fell by 4 basis points to a two-month low of 4.75%; meanwhile, traders increased their bets on the UK central bank policymakers, expecting them to keep the benchmark interest rate unchanged at 3.75% on Thursday and raise it by another 25 basis points by the end of the year. Jeremy Bartstone-Carr, European strategist at Raymond James Wealth Management, said, "Today's data cannot be a strong reason to adjust the base rate tomorrow." Data shows that the UK's overall Consumer Price Index (CPI) rose by 2.8% year-on-year in May, unchanged from April, and lower than economists' expectations of 3%. This indicates that price pressures were weaker than expected even before the agreement to end the Iran war in the US led to a sharp drop in energy costs. However, the service sector inflation rate rose to 3.7%, higher than expected, still causing concern. UK 10-year government bond yields hit a two-month low Before the US and Iran launched attacks in Iran at the end of February, causing oil prices to soar, traders had expected the Bank of England to cut interest rates by 50 basis points this year. However, the closure of the Strait of Hormuz to most shipping disrupted these bets, and the market quickly shifted to pricing in up to four rate hikes of 25 basis points each. Due to the UK's high dependence on imported energy, coupled with concerns that political unrest could further weaken the already fragile fiscal outlook, the sell-off in UK government bonds has been more severe than in other G7 countries. However, with hopes of a peace agreement driving down oil prices, and the UK economy seeing its first contraction in eight months in April, bets on rate hikes have been gradually reduced. Andrew Wishart, senior economist at Beerenberg Bank, said about the May inflation data, "All of this should gradually guide the market towards our view that the Bank of England will not raise interest rates this year." He predicts a rate cut of 25 basis points in December, followed by two more cuts (each 25 basis points) in the first half of next year. Nevertheless, UK government bonds may still face further volatility in the coming days. UK Prime Minister Starmer is expected to face a leadership challenge soon, and if Andy Burnham wins the by-election on Thursday, this challenge may be led by his former Health Secretary Wes Streeting or Manchester Mayor Burnham.