Healey facing £6bn hit as UK borrowing costs reach highest point since financial crisis
UK borrowing costs have hit their highest level since the financial crisis as gilts were swept up in a mass rout across global bond markets. The UK government is set to pay a higher rate on debt interest as 10-year gilt yields, the benchmark for borrowing costs, were up by as much as 15 basis [...]
Borrowing costs for the UK have reached their highest point since the financial crisis, with gilts experiencing a significant decline in value. The 10-year gilt yield, which serves as the benchmark for borrowing costs, has surged by up to 15 basis points, reaching an 18-year high of approximately 5.2%. This jump in borrowing costs is notably higher than those in the US, Japan, and Germany, indicating the impact of heightened inflation fears due to the Middle East tensions.
Kathleen Brooks, research director at XTB, attributes the increase in bond yields worldwide to the rise in oil prices. The Brent crude oil benchmark reached $91 per barrel, following escalating tensions between the US and Iran. While some market analysts believe the Middle East unrest may be short-lived, there are concerns that a continued trade disruption could persist.
With just two months until the US mid-term elections, concerns arise that President Trump, who shows no signs of backing away from the war in Iran, could worsen the situation. This volatility could pressure investors to reckon with the possibility that higher oil prices might become permanent.
Panmure Liberum economist Simon French warns that the rise in 20-year gilt yields could strain the remaining fiscal headroom for the UK government, potentially costing John Healey up to £6 billion. The headroom, which reflects the government's commitment to aligning spending with tax revenues by 2030, currently stands at around £22.7 billion.
The Office for Budget Responsibility (OBR) projections would add approximately £137 billion in debt interest payments by 2030. Economists suggest that the Bank of England may respond by reducing the pace of its quantitative tightening (QT) programme, which could help alleviate the upward pressure on gilt yields.
Michael Saunders, an adviser at Oxford Economics, proposes that the Bank of England could ease the QT program from £70 billion in the current year to £50 billion to curb the rise in gilt yields. The Bank has maintained that the QT programme has had a minor impact on market pricing, but politicians from various parties, including Chancellor of the Duchy of Lancaster Louise Haigh and Reform UK's Richard Tice, have criticized the Bank's sell-off, arguing that it costs taxpayers billions of pounds.
Analysts remain divided on whether the Bank's Monetary Policy Committee will increase interest rates later in the year, as the situation depends on the evolving relations between Iran and the US. Meanwhile, analysts warn that higher gilt yields could negatively impact the housing market in the short term, as higher borrowing costs would reduce the value of commercial property and potentially lead to a decline in mortgage approvals.
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