The weakening British pound has reached a nine-month low as UK government borrowing costs continue to escalate. The drop in sterling was exacerbated as UK 10-year borrowing costs rose to their highest levels since the 2008 financial crisis, when bank borrowing was severely restricted. Economists have warned that these rising costs could lead to further tax increases or cuts to spending plans, as the government strives to reach its self-imposed borrowing target. A report from its independent forecaster is due in March.
“I’m obviously not going to get ahead … it’s up to the OBR (Office for Budget Responsibility) to make their forecasts,” noted the government, adding that economic stability was dependent on preserving public finance stability and economic growth. As the cost of borrowing over the next 30 years reached its highest level in 27 years on Tuesday, the pound fell by over 1.1% to $1.233, a nine-month low. The government spends more than it raises in tax; to fill the gap, it borrows money, which has to be repaid with interest.
Gabriel McKeown, head of macroeconomics at Sad Rabbit Investments, warned that the rise in borrowing costs threatened to derail Labour’s investment promises, as Chancellor of the Exchequer, Phillip Hammond’s spending and borrowing plans were to making it more expensive for the government to borrow. He added, Hammond must manage to maintain stability and balance the needs of the individual with satisfying the requirements of the state.
The rise in the cost of government borrowing globally in recent months has been sparked by investor concerns over proposed policies of US President-elect, Donald Trump’s and fears of growing US debt are colliding with persistent inflation. The US, interest rates on 10-year government bonds rose on Wednesday, before dropping back at mid-day to more than 4.7%, still the highest level since April. Danni Hewson, head of financial analysis at AJ Bell, pointed out that the situation mirrored that seen in the US, and creates “uncertainty about his tariff plans are already rattling investor nerves.” The official forecaster, the Office for Budget Responsibility (OBR), will start the process of updating its forecast on government borrowing next month to be presented to parliament in late March
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