Britain's borrowing costs rise as Reeves' budget sparks concerns about a slowdown in interest rate cuts | government borrowing

The UK government's borrowing costs rose to their highest level this year as city investors bet Rachel Reeves' budget will force the Bank of England to adopt a more cautious approach to interest rate cuts.

In fact, the yield on 10-year British government bonds rose more than 0.15% to trade above 4.5% on Thursday before falling slightly as financial markets reacted to Labor's first budget in 14 years.

The pound also fell against the US dollar, and the FTSE 100 index fell amid a widespread global sell-off. This reflects greater anxiety about the prospect of the world's most powerful central banks keeping interest rates higher for longer.

Bond sales increase government borrowing costs

Susannah Streeter, head of funds and markets at investment service Hargreaves Lansdown, said the quiet optimism that seemed to spread during Rachel Reeves' speech had disappeared and higher risk premiums had returned for UK debt.

Bond yields are expected to continue to fluctuate as institutions that finance government borrowing remain increasingly skeptical about where their bloated investment budgets will be spent.

In a historic budget aimed at starting the work of repairing devastated public services and restarting economic growth, the Prime Minister announced a £70 billion increase in spending on services and infrastructure, more than half of which would be funded by tax rises.

City analysts said Reeves announced a larger-than-expected expansion package, including higher short-term borrowing before new revised fiscal rules take effect within five years.

Analysts said this would force the government to sell more bonds, known as gilts, to cover its financing needs. The chancellor's plan is also likely to increase inflation, complicating the Bank of England's path to interest rate cuts.

“Today’s selling across the curve appears to partly reflect the outlook for higher-than-expected issuance beyond this fiscal,” said Shreyas Gopal, an analyst at Deutsche Bank.

Now the stakes are higher for next week's Bank of England meeting.

Pre-budget financial markets had widely expected the central bank to cut interest rates from the current 5% to around 3.75% by the end of next year, followed by a quarter-point cut next Thursday.

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But the Office for Budget Responsibility, an independent Treasury watchdog, said it had raised its base rate forecast by 0.25 percentage points over the five-year outlook to reflect the additional stimulus Reeves' budget would deliver to the economy.

The financial market expected the base rate to reach about 4% by the end of next year, with the rate of base interest rate reduction reduced after the budget.

Analysts said that while the rise in gilt yields reflected concerns in financial markets about Reeves' budget, the movement was still fairly muted compared to the fallout sparked by Liz Truss' smaller budget.

David Page and Gabriella Dickens of Axa Investment Managers said: In terms of overall market valuation, this should in no way be compared to the disastrously small budget delivered under Liz Truss' brief reign in 2022.

Gold bond yields rose 33 basis points on this day and continued to rise by 100 basis points over the next three sessions.

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