The Bank of England last night sounded the alarm over 'sparks in the tinderbox' of global inflation as bond yields soared and rate rise fears deepened.

Deputy governor Sarah Breeden said it looked 'increasingly appropriate' to hike rates as oil prices surged above $108 a barrel, adding to the global price pressures.

The oil surge, combined with US rate hike speculation, sent global bonds on another rollercoaster ride yesterday, with 30-year US bond yields hitting their highest level since 2004.

UK bonds, known as gilts, were also hit – with yields on ten-year gilts climbing close to 5.4 per cent, nearing the 19-year high seen earlier this month.

Bond markets have been in flux since the war with Iran began earlier this year and, with hopes of a lasting resolution looking as far away as ever, yields have continued to climb.

On top of that, food prices are on the rise as summer heatwaves hit harvests and the El Nino weather system threatens further disruption.

Worries about Labour's Budget plans are also weighing on investors' minds, especially as Prime Minister Andy Burnham reiterated his belief that Britain should not be 'in hock' to bond markets. 

Meanwhile, Chancellor John Healey is considering allowing his Budget headroom to shrink in order to avoid large tax rises.

Breeden told an event in London: 'The more sparks we're throwing in the tinderbox, the more likely we might have to turn the hose on it.'

Her remarks added to the signals from the Bank of England that it is getting ready to put up rates in November. It is the only major central bank not to have put up rates this year.

At its most recent meeting last week, the Bank's Monetary Policy Committee left rates on hold even as it forecast that inflation will top 4 per cent next January, with already-high energy bills rising by a further 24 per cent in January. 

However, it signalled that if the war continued, a hike was likely. 

Rate-setters have been waiting to see whether the surge in oil and gas prices proves only a temporary jolt or will have more lasting effects as it spreads through the economy.

But yesterday Breeden said: 'The larger and longer the shock, the more likely it is that we'll see second-round effects that policy needs to respond to.'

Her comments were echoed by Clare Lombardelli, also deputy governor at the Bank, during a speech in Warsaw.

'The longer higher energy prices persist, the greater the risk that indirect effects build and that inflation expectations, wage bargaining and price-setting behaviour begin to adjust in response,' she said.

Financial markets see a 75 per cent chance that the Bank will increase its benchmark rate from 3.75 per cent to 4 per cent in November and are betting on a further three hikes by the end of next year.

However, Lombardelli played down comparisons with the cost-of-living crisis in 2021 and 2022 when inflation surged into double digits. That forced the Bank into a series of rate increases from 0.1 per cent to 5.25 per cent.

'We are in a very different place from the tightening cycle of 2021-22,' she said, pointing out that rates then had started off at a much lower level.