Medium-term borrowing costs for the UK government reached a 19-year high on Thursday, as investors continued to offload global bonds amid fears of rising inflation. This development is expected to increase pressure on John Healey ahead of his first budget as chancellor on 28 October.
Rising Yields
The yield, or interest rate, on 10-year UK government bonds surged by 0.06 percentage points by lunchtime in London, reaching 5.515%. This marks the highest level since July 2007, coinciding with the onset of the global financial crisis. Yields on 20- and 30-year UK government bonds, known as gilts, also saw significant increases, reaching their highest levels since 1998.
Yields typically rise when bond prices fall, indicating a shift in investor sentiment.
Economic Impact
Economists predict that the rising borrowing costs and a weaker growth outlook may have eroded approximately half of the £24 billion buffer against Labour’s fiscal rules that Healey’s predecessor, Rachel Reeves, established during her spring statement in March. Healey is anticipated to raise taxes in the upcoming budget to help rebuild this cushion and fund policy interventions, including a six-month VAT cut on electricity bills and a modest energy support package for low-income households.
