The British pound continued to decline on Thursday following a sharp rise in government borrowing costs, adding to concerns over the state of the UK’s public finances.
Sterling slipped further as the yield on 10-year UK government bonds, known as gilts, reached its highest point since the 2008 financial crisis, intensifying investor anxiety.
The surge in borrowing costs has raised concerns that the government may need to implement further tax hikes or spending cuts to meet its fiscal targets. A spokesperson for the UK Treasury reiterated that the government’s commitment to adhering to its fiscal rules remains firm, emphasizing that it will continue to focus on delivering economic growth while managing public finances responsibly.
Despite these assurances, the bond market sell-off has put significant pressure on the UK economy, with borrowing costs climbing for the third consecutive day. On Thursday morning, the yield on the 10-year gilt rose to 4.93%, before slightly easing back to 4.84%. This increase follows a broader global rise in government bond yields, partly triggered by investor concerns over inflation and fiscal policy in other major economies.
As the UK government borrows more money to meet its spending needs, the cost of servicing its debt rises. This increase in borrowing costs can limit the government’s ability to invest in public services or support economic growth. Economists have warned that the continued rise in borrowing costs may force the government to reconsider its fiscal policies. Some suggest that the chancellor, Rachel Reeves, may need to either raise taxes or reduce spending further to manage the growing interest payments.
The pound, which typically strengthens when borrowing costs rise, has been under pressure due to broader concerns about the UK economy. On Thursday, the pound fell by 0.6%, trading at approximately $1.229, its lowest level since November 2023. Analysts noted that while the rise in borrowing costs is a global trend, it is particularly concerning for the UK, given the country’s high borrowing requirements and the looming threat of stagflation, where inflation persists despite sluggish economic growth.
The government has already faced challenges in maintaining fiscal stability, with increasing borrowing costs threatening to derail plans laid out in the recent budget. Some economists have drawn comparisons to the economic turmoil of 2022, when former Prime Minister Liz Truss’s mini-budget triggered a crisis in the bond market. However, analysts also caution that the situation, while concerning, is not yet at the level of crisis experienced in 2022.
With input from Reuters, BBC, the Financial Times, and the Guardian.
