What were the drivers of UK long-term interest rates in 2025?

Published on 23 January 2026

By Lisa Panigrahi and Amarjot Sidhu

Long-term interest rates increased materially during the first three quarters of 2025, both in the UK and advanced economy peers. UK long-term rates then fell back during the fourth quarter, though remain close to their highest levels in over a decade.

The primary driver of the increases in long rates was higher term premia, the compensation investors require for holding long-term bonds instead of a series of short-term bonds.

This rise in term premia can largely be attributed to global factors, such as geopolitical uncertainty and concerns around fiscal sustainability; in the UK, these were amplified by demand and supply factors in the gilt market, with the latter abating later in the year.

Long rates are relevant for the Monetary Policy Committee (MPC) since they can impact the outlook for inflation, albeit more modestly than shorter rates, and can also provide information about market participants’ long-run macroeconomic expectations. The Financial Policy Committee also monitors long rate developments, as sharp moves can crystalise financial stability vulnerabilities.

UK long rates hit their highest levels in over a decade amid a global trend of rising rates through 2025

Long-term government bond yields, spanning maturities of 10 years and longer, increased materially across the UK and advanced economies in the first three quarters of 2025. These increases marked a continuation of an upward trend in long-term rates across countries since 2021.

From the start of January to the peak in early September 2025, the 10-year gilt yield increased by around 20 basis points (bps) to a level of 4.8% and the 30-year by around 50bps to a level of 5.7%. Increases were also observed in other advanced economies (Chart 1), which led to a steepening in yield curves, as measured by the gap between these rates (Chart 2).

UK long rates then fell back between September and end-2025, prompting the yield curve to flatten too (Chart 2). These moves left UK long rates only marginally different to where they started the year, with the 10-year yield down around 12bps overall to a level of 4.5% and the 30-year yield up around 4bps to a level of 5.2%. However, the same is not true for most developed market peers where long rates ended the year materially higher and yield curves steeper than where they started (Charts 1 and 2).

Despite this round trip observed in UK long rates, they ended 2025 at levels which remain close to the recent historic highs, with 10-year yields at levels previously observed in 2008 and 30-year yields at their highest levels since the turn of this century. This level of UK long rates puts them at the top of the levels observed across global peers (Chart 3), in part due to the relatively higher level of UK short rates. This post will focus on the changes to these levels observed over 2025.

A line or bar chart showing the change in 30-year government bond yields across several advanced economies (including the UK, US, Germany, Italy, France, Japan, and Canada) from January to December 2025. The chart highlights a significant rise in yields during the first three quarters, peaking in early September, followed by a partial decline towards year-end. The UK’s 30-year yield remains among the highest compared to peers.

Note: Spot rates used.
Sources: Bloomberg LP and Bank calculations. Data updated to 19 December 2025.

A line chart illustrating the yield curve steepness by plotting the gap between 30-year and 10-year government bond yields for the UK and selected advanced economies throughout 2025. The chart shows a steepening trend in the first three quarters, with the gap narrowing (flattening) in the UK during the final quarter, while most peers maintain a steeper curve by year-end.

Note: Spot rates used.
Sources: Bloomberg LP and Bank calculations. Data updated to 19 December 2025.

A comparative chart displaying the range of 30-year government bond yields across advanced economies (UK, US, Germany, Italy, France, Japan, Canada) as of December 19, 2025. The UK’s 30-year yield is shown at the upper end of the range, indicating it is among the highest in this group.

Note: Spot rates used. Swathe includes: UK, US, Germany, Italy, France, Japan and Canada. Data updated to 19 December 2025.
Sources: Bloomberg LP and Bank calculations.

Factors affecting real term premia were the main drivers of UK long rates in 2025

Longer-term yields can be decomposed into two components: a) expectations of future short-term interest rates and b) a term premium, which is the additional compensation investors require for holding long-term bonds relative to a series of shorter-term bonds. Each of these, in turn, can be separated into their real and inflation components, as visualised in Figure A, and can be driven by domestic and global factors.

A Figure illustrating how a nominal government bond yield is broken down into its component parts: expected future short term interest rates and the term premium. Each of these is further separated into real and inflation components. The figure shows a stacked conceptual structure demonstrating how real rate expectations, real term premia, inflation expectations and inflation risk premia combine to form the overall nominal yield.

Source: Guimarães (2012).

Real term premia were the key driver of moves in UK long-term interest rates over 2025. That was both during the moves up over the first three quarters of 2025, as well as the moves down from September, with falling expected short rates also playing a role during the latter period.

Spot long rates, which we have discussed so far in this post, capture the average of moves across the yield curve up to that point. They will therefore be impacted by changes in short end rates. Forward rates at the long end of the curve attempt to capture the expected interest rate over those points of the curve only. To abstract from short end moves, we can look at forward rates at the long end of the curve to isolate the factors affecting that segment specifically.

Decompositions of five-year, five-year forward gilt yields show that for most of 2025, real term premia pushed up on UK long-term interest rates (Chart 4, aqua bars). Chart 4 also shows that these decreased on net through the last quarter of 2025.

Meanwhile, real policy rate expectations were little changed through 2025 (purple bars). Inflation expectations similarly played a small role (orange bars), consistent with medium-term inflation expectations being well anchored through 2025 according to the Market Participants Survey. And our model-based decomposition suggests that inflation risk premia fell during 2025 (gold bars).

A stacked bar chart breaking down the drivers of changes in the UK’s 5-year, 5-year forward government bond yield during 2025. The bars are segmented by components: real term premia (aqua), real policy rate expectations (purple), inflation expectations (orange), and inflation risk premia (gold). The chart shows that real term premia were the main driver of yield changes, with a notable reduction in the last quarter, while other components played a smaller role.

Note: The term premia and expected rates components come from a combination of our term structure models including Malilk and Meldrum (2016), Vlieghe (2016) and Andreasen and Meldrum (2015), the inflation components come from an inflation risk premia model which is an adaptation of Joslin, Singleton and Zhu (2011) and Kim and Orphanides (2012). Data updated to 18 December 2025.
Sources: Bloomberg LP Consensus Economics, Office for National Statistics, Tradeweb and Bank calculations.

Global developments were the primary driver of moves in UK real term premia in 2025

Much of the increase in UK real term premia reflected global developments. And as an open economy, increases in risk premia abroad often spill over to the UK. Elevated global uncertainty, including around geopolitical and trade policy developments, were a key contributor to higher real term premia, both in the UK and abroad, as reflected in market commentary and conversations we have had with market participants.

Global fiscal dynamics have also pushed up on long rates in recent years. Global issuance has been at historically elevated levels. The elevated issuance and related uncertainty about the outlook for fiscal sustainability has pushed up on the compensation investors require to hold longer-maturity bonds. Indeed, Isabel Schnabel, a member of the European Central Bank’s Executive Board, argued last year that the ‘global bond glut’ has reduced how much participants are willing to pay for government bonds.

UK-specific factors have likely also contributed to moves in real term premia over the year

Though global developments were the primary driver of real term premia and long rates last year, gilt supply and demand dynamics likely also contributed.

In particular, the UK has experienced structural changes in demand for UK long-dated gilts. Liability-driven investment (LDI) strategies for defined benefit pension funds have traditionally involved buying long-dated gilts. But improved fund solvency as rates have risen has reduced gilt investment needs. As a result, long-maturity gilt supply is increasingly being met by more price-sensitive participants, who do not have a natural demand for long-dated gilts and whose demand is shaped more by relative returns across asset classes and jurisdictions. This evolving investor base may have amplified the sensitivity of UK long rates to global shocks.

In addition, for much of 2025, market participants pointed to uncertainty about the extent of the Government’s fiscal headroom and issuance needs as being potential drivers of higher term premia in the UK.

These factors likely contributed to elevated term premia through much of the year, before supply developments and the Budget caused term premia to fall back over the last quarter of 2025.

In early September, the UK Debt Management Office announced it would cancel an auction of longer-dated gilts, and then as a part of the November Budget, that it would issue a smaller share of gilts at longer maturities. Market expectations around the fiscal outlook also started to evolve in the run-up to the Budget and were then broadly met in November.

Market participants reported that these supply announcements and fiscal developments played a large role in the fall in UK long rates through Q4. This is also reflected in the reduction in real term premia in Chart 4.

Also in September, the MPC announced its annual decision for the pace of reduction in the stock of UK government bond purchases held for monetary policy purposes, a process known as quantitative tightening (QT); it voted for a pace of £70 billion for the period October 2025 to September 2026. As part of implementing the MPC’s stock decision, the Bank announced it would aim to sell fewer long maturity sector gilts than gilts at other maturities, to better reflect demand conditions. The MPC’s QT programme may have contributed to the rise in UK long-term rates since the programme began in February 2022. But Bank staff analysis suggests that QT has only had a modest effect on term premia over this time (Box B of the August 2025 Monetary Policy Report), though there is a high degree of uncertainty around these estimates.

The Monetary Policy Committee takes account of the impact of long-term interest rates when setting Bank Rate

Long-term interest rates affect financial market conditions, which the MPC takes account of when setting Bank Rate. Long-term risk-free rates can matter for financial wealth, as they are often used as the relevant comparator for valuing ‘long-duration’ assets such as equities. They can also affect the cost of market-based external financing used by large corporates.

As a result, a rise in long-term rates would be expected to have some contractionary effect on GDP and inflation. These impacts are typically smaller than those from commensurate increases at shorter maturities, though are likely to vary across different states of the world. Movements in medium-term rates, especially 2–5 year overnight index swap rates, can have a relatively larger impact on GDP and inflation than those in longer-dated yields through their influence on household borrowing costs. More detail on the monetary transmission mechanism can be found in Burr and Willems (2024).

Finally, long rates can tell us about markets participants’ view of the macroeconomy, including the long-term outlook for inflation and growth, as well as the long-term trend real interest rate R* (Box C of the February 2024 Monetary Policy Report).

The Financial Policy Committee also monitors developments in long rates, as sharp moves can crystalise financial stability vulnerabilities

Alongside their impact on the real economy, long-dated gilts support the UK financial system as a safe and liquid asset, including for use as collateral. As such, disorderly sharp moves in long rates can crystalise financial stability vulnerabilities, as was the case during the 2022 LDI crisis (In focus: The resilience of liability driven investment funds, December 2022 Financial Stability Report), though the resilience of LDI funds to these shocks has been enhanced by regulatory action since then (see Box D, July 2025 Financial Stability Report). Additionally, volatility in the gilt market can also spill over to other core funding markets, such as the repo market (see Section 3, November 2024 system-wide exploratory scenario exercise final report).

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