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Britain’s long-term borrowing costs have risen to their highest level since 1998, as a bond sale threatens to wipe out the ‘room for maneuver’ Chancellor Rachel Reeves has under her fiscal rules recently revised.
The 30-year gilt yield rose to 5.25% on Tuesday, surpassing its previous peak in October 2023 and eclipsing levels reached at the height of the market fallout following Liz Truss’s ill-fated “mini” budget the previous year.
The new high came after the Treasury paid its highest 30-year borrowing cost in the century, selling £2.25 billion of new debt at a yield of 5.20 per cent.
Recent rises in interest costs, if sustained, would almost wipe out the extra borrowing room allowed under the Chancellor’s own fiscal rules, economists warned on Tuesday. The moves come alongside a weakening of growth expectations that could further worsen the outlook as ministers await a new round of budget forecasts in March.
The strains in the UK market come amid massive sell-offs in government bonds globally in recent months, driven in part by fears that US President-elect Donald Trump’s tariff plans could be inflationary.
The golden investors were particularly worried that a mix of anemic growth and persistent price pressures will push the UK into a period of stagflation, where the Bank of England will be forced to cut rates to support the economy.
“There’s probably some sort of buyers’ strike going on at the moment,” said Craig Inches, head of rates and liquidity at Royal London Asset Management. He said the combination of a high volume of sales of long-term government securities and “mixed” UK economic data was discouraging investors from taking on very long-term debt.
The British economy contracted for a second consecutive month in October and failed to grow in the third quarter. Business confidence has been shaken following Reeves’ decision to push through a £25 billion increase in employers’ National Insurance contributions in the Budget, which, combined with planned increases in the National Living Wage, will increase labor costs.
At the same time, recent data shows continued signs of persistent inflation. Consumer price growth accelerated in November to 2.6 percent from 2.3 percent the previous month, prompting investors to lower their hopes for interest rate cuts in 2025.
The movements in gilts will be of great concern to the Treasury, given that Reeves left herself just £9.9 billion of headroom over her key fiscal rule when she outlined her borrowing plans in the Treasury. October Budget.
The Treasury is expecting a new set of official forecasts from the Office for Budget Responsibility in March, which will include a new estimate of how much room the government has to maneuver under its self-imposed tax regime.
Ruth Gregory, economist at Capital Economics, said the latest rises in yields and rate expectations, if sustained, would leave the chancellor with just £1.1tn of headroom over the key fiscal rule of the chancellor, which requires him to cover current expenses – excluding investments – with tax receipts.
This is without taking into account any adjustments to the OBR’s economic forecasts, which will also affect the fiscal outlook.
The final margin forecast will only be determined closer to the publication of the next OBR outlook. The fiscal watchdog must produce two forecasts per fiscal year, and it is scheduled to provide an update on March 26 on whether Reeves is on track to meet its borrowing rules.
But a set of forecasts suggesting the Treasury is breaching its fiscal rules would pose a huge headache so soon after the chancellor’s first Budget.
The situation is particularly difficult given the Chancellor’s decision to hold just one major budget event per year, meaning she intends to wait until this autumn before pushing through her next set of tax and borrowing decisions. This means that any planned violations of budget rules before then may have to be corrected with strict spending measures.
“If the OBR judges in March that the main fiscal rule is not being met, to maintain fiscal credibility the chancellor may need to take some form of action,” Gregory said.
“There is therefore a risk that to meet the main fiscal rule, additional revenue-generating tax increases or spending restraint will be necessary. Regardless, there appears to be a risk that fiscal policy will be tighter than it otherwise would have been.”
A Treasury spokesperson said it would not pre-empt the OBR’s forecasts but that compliance with fiscal rules was “non-negotiable”, adding: “The Chancellor has made clear she will not repeat the October budget and is now focused on eradicating the budget. wastage of public expenditure through expenditure review and growth of the economy.
