UK borrowing costs at highest for a year after Budget

The cost of borrowing for the UK government has surged to its highest level in over a year following the recent Budget announcement. On Thursday, the yield—the interest rate that the government must pay to lenders for borrowing money over a 10-year period—climbed above 4.5% before retracting slightly.

This increase in yields comes in the wake of Chancellor Rachel Reeves’s announcement of a significant rise in government borrowing intended to fund various spending projects. The news has sparked concerns among investors, leading to expectations that interest rates will decline at a slower pace than previously anticipated.

The implications of this rise are significant. Higher borrowing costs mean that the government will need to pay more to finance its debt. Furthermore, bond yields serve as a benchmark for determining interest rates on everyday loans and mortgages. Consequently, the increase in government borrowing costs signals that investors view lending to the UK government as a greater risk than before.

On Thursday afternoon, the yield on 10-year government bonds peaked at 4.53% before settling back to 4.46%. In response to these developments, Chancellor Reeves assured Bloomberg TV that the government’s “number one commitment” remains “economic and fiscal stability.” She emphasized that the public finances are now on a “stable and solid trajectory.”

Earlier, a spokesperson for Sir Keir Starmer indicated that the government’s approach had garnered positive reactions from organizations like the International Monetary Fund (IMF). The Chancellor’s Budget outlined nearly £70 billion in additional spending annually, funded through increased business taxes and additional borrowing.

However, analysts have noted that the upward movement in bond yields suggests a lack of confidence in the government’s spending plans. Kathleen Brooks, an analyst at trading firm XTB, remarked that the Budget “has not been well received” by financial markets. She added, “This is another sign that the chancellor overestimated the market’s appetite for absorbing more sovereign debt issuance from the UK.”

Susannah Streeter, head of money and markets at Hargreaves Lansdown, echoed this sentiment, explaining that expectations for interest rate cuts have been revised downward. Given projections that the Budget could contribute to inflationary pressures over the next two years, she noted, “Financial markets are now not expecting rates to fall below 4% until 2026.”

Streeter highlighted that the spike in UK gilt yields reflects this shift in sentiment, while also indicating growing apprehension regarding Labour’s management of the economy, particularly as the value of the pound has remained low against the dollar. The volatility of bond yields is likely to persist, as institutions financing government borrowing will likely keep a watchful eye on how the enlarged investment budget is utilized.

The higher borrowing costs pose a challenge for the government as it navigates its fiscal policy in a climate of rising inflation and economic uncertainty. The combination of increased spending and tax hikes is designed to stimulate growth, but if investor confidence continues to waver, it may lead to tighter financial conditions.

In summary, the recent Budget has triggered a notable rise in the cost of government borrowing in the UK, reflecting investor concerns about increased spending and its potential impact on inflation. As the government works to stabilize its public finances, the reaction from financial markets serves as a crucial indicator of the broader economic landscape. With the specter of prolonged higher interest rates and the possibility of inflationary pressures, the path ahead for the UK’s economic management remains complex and fraught with challenges.