Borrowing costs soar to post-financial crisis high in blow to Reeves
UK government borrowing costs have soared to their highest level since the Great Financial Crisis in 2008, with markets frightened by the state of public finances in the face of another global price shock.
Gilt yields have inched up over the course of the week, with the ten-year gilt yield topping 4.9 per cent on Friday morning.
The ten-year gilt yield was last over the five per cent mark in early 2008.
Investors have sold off government bonds across the world en masse, though UK bonds have been more heavily affected over the week than those for the US, Germany and Japan.
Higher gilt yields translate into larger borrowing costs for the government. Before the start of the war, the Office for Budget Responsibility (OBR) suggested that debt interest payments to bondholders would be £110bn this year.
It was revealed on Friday morning that the government owed around £4.3bn to its lenders in February.
Market movements will send shivers running through the Treasury. At the beginning of this month, Rachel Reeves hailed a fall in gilt yields that added nearly £2bn to her fiscal headroom, per revised OBR forecasts based on data collected before the start of the war.
That buffer is now likely to be far smaller, with debt interest payments set to be larger and medium-term expectations expected to worsen.
Forecasters make radical downgrades
Earlier this year, traders had hedged their bets on a string of interest rate cuts over the course of the year after Reeves tweaked energy pricing to lower household bills and reduce inflation.
The Bank of England said on Thursday that those changes, which were set to help bring inflation down to two per cent from April, will be cancelled out by rising fuel prices at petrol pumps.
Analysts at JP Morgan and other City firms have now predicted that interest rates could rise to as high as 4.25 per cent due to an expected jump in inflation.
Forecasters have also revised their forecasts to reflect a bleaker outlook for the UK economy.
Oxford Economics’ Edward Allenby said higher oil and gas prices would lead to an increase in the Ofgem energy price cap of at least 19 per cent from July.
He suggested UK inflation could exceed four per cent after the middle of the year.
UK GDP was also only set to grow 0.4 per cent this year and one per cent next year, a radical downgrade on previous forecasts.
Reeves oversees higher borrowing
The Office for National Statistics (ONS) also delivered bleak figures on government borrowing, with the deficit over February being more than double a forecast by the OBR.
Pantheon Macroeconomics analysts said the rise in borrowing left public finances “in a more precarious position heading into the latest energy price shock”.
Pantheon economist Elliott Jordan-Doak suggested pressure on Reeves from Labour officials and the public to announce a multi-billion pound energy support package to lead the Chancellor to make “difficult decisions” around taxation and public expenditure by the end of the year.
After Russia’s full-scale invasion of Ukraine, the Conservative government spent around £40bn on supporting household bills.
While UK gas prices have not hit the same heights as in 2022, Reeves has reportedly faced calls from within the Cabinet for her fiscal rules to be loosened amid speculation that she may announce a broader support package for households to deal with price rises.