The UK government has seen the cost of its borrowing surge to its highest level in over a year following the announcement of Wednesday’s Budget. The interest rate, or yield, for borrowing over a 10-year period rose above 4.5% before falling back. The increase has been driven by forecasts for a slower reduction in interest rates due to a sharp rise in government borrowing to finance spending projects.
The hike marks a signal to investors that lending to the government presents greater risk. Higher bond yields are not only detrimental to the amount the government must pay to borrow, they also impact setting the rates for mortgages and everyday loans. Chancellor Rachel Reeves cited the government’s “number one commitment” to “economic and fiscal stability”. The comments came following reaction from the International Monetary Fund welcoming the government’s proposal.
Analysts pointed to the rise of bond yields as an indication the market was unhappy with the increase in government spending. Susannah Streeter, the head of money and markets at Hargreaves Lansdown, suggests that expectations for interest rate cuts have been scaled back due to forecasts of increased inflation, and as such, financial markets are now not expecting rates to fall below 4% until 2026.
Although there has been a wider rise in borrowing costs, commentators considered this to be a natural market adjustment, rather than panicked reaction as witnessed after Liz Truss’s mini-Budget two years ago. Kathleen Brooks, an analyst at trading firm XTB, noted that the market’s desire to absorb more sovereign debt issuance from the UK had been overestimated by the Chancellor
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