Chancellor Rachel Reeves faced a setback as government borrowing costs surged to their highest level in nearly 30 years. The interest rate on 30-year UK gilts peaked at 5.70% on Tuesday amid concerns about the economic outlook and global government borrowing trends.
The recent increase in long-term borrowing costs, the highest since 1998, adds to the pressure on Ms. Reeves ahead of the upcoming autumn Budget. The substantial burden of servicing the national debt, which totaled more than £7 billion in July alone, poses a significant strain on public finances.
Due to the scale of the debt and persistent high inflation levels, the UK currently experiences the highest borrowing costs among G7 countries. However, borrowing costs are also on the rise in other advanced economies, including the US.
Despite this, the rates on 10-year UK gilts, a key indicator for investors, climbed to 4.8%, remaining below the 16-year high of 4.93% seen in January.
Financial experts cautioned that these escalating costs may compel Ms. Reeves to make tough decisions in her upcoming Budget. Nigel Green, CEO of deVere Group, emphasized the necessity for credible fiscal policies to address the rising debt levels.
Market analyst Joshua Mahoney highlighted the challenges facing Ms. Reeves in balancing revenue generation without stifling economic growth. The weak pound reflects concerns about potential rate cuts by the Bank of England and the overall stability of the UK economy.
The recent spike in gilts follows a period of turmoil for the Government, prompting Prime Minister Keir Starmer to reorganize his Downing Street team. Darren Jones, Ms. Reeves’ former deputy in the Treasury, has taken on a new role as the Prime Minister’s chief secretary, with James Murray assuming the position of Treasury chief secretary.
Neil Wilson, UK investor strategist at Saxo Markets, noted that the market reaction signifies investor doubts regarding the Treasury’s adherence to strict borrowing rules.