Chancellor Rachel Reeves faced a setback as government borrowing costs surged to their highest level in nearly three decades. The interest rate on 30-year UK gilts peaked at 5.70% due to concerns about the economic outlook and rising global government bond yields.
These elevated long-term borrowing costs, not seen since 1998, are increasing the pressure on Ms. Reeves ahead of the autumn Budget. Servicing the national debt has become a significant financial burden, costing over £7 billion in July alone.
The UK now has the highest borrowing costs among G7 nations, attributed to the substantial debt and persistent inflation. However, similar trends are emerging in other advanced economies, such as the US. The rates on 10-year UK gilts, a key indicator for investors, rose to 4.8%, still below the 16-year high reached earlier in the year.
Financial experts cautioned that the escalating borrowing costs may compel Ms. Reeves to make challenging decisions in her upcoming Budget. The surge in bond market signals underscores the necessity for credible fiscal management. Tough measures like tax hikes or spending cuts may be unavoidable to demonstrate a commitment to reducing Britain’s debt in line with fiscal rules.
Market analysts emphasized the need for balanced solutions to raise funds without stifling economic growth. Concerns over potential policy adjustments driving anti-growth sentiments were highlighted, with implications on the pound’s weakness and potential Bank of England rate cuts.
The recent spike in gilts followed Prime Minister Keir Starmer’s reorganization of his Downing Street team after a challenging period for the Government. Notably, Darren Jones assumed the role of the Prime Minister’s chief secretary, succeeding Ms. Reeves’ former position in the Treasury.
UK investor strategist Neil Wilson pointed out that the market response indicated investor skepticism regarding the Treasury’s adherence to stringent borrowing regulations.
