Britain’s Cost of Borrowing Reaches 20-Year High

UK £5, £10, £20, and £50 notes with £1 coins, shown in a file photo dated Jan. 26, 2018. (Dominic Lipinski/PA)

The UK’s cost of borrowing has reached the highest level since 2002, as the interest rate on 30-year government bonds hit 5.05 percent on Wednesday.

The increase in the interest rate comes as the price of 30-year UK government bonds has fallen again, amid anticipation that global interest rates will stay high for a longer period of time.

UK government bonds, known as gilts, are bought by financial institutions in the UK and globally. Investors are promised regular interest payments, or yields, in return for lending the government their money over the bond’s lifetime. This can include periods from one month to 30 years.

The yield is now higher than in the aftermath of former Prime Minister Liz Truss’s mini-budget that announced tax cuts and unfunded spending, causing a financial market meltdown.

At the time the interest rate on 30-year government bonds increased by up to 4.8 percent, which is still lower than the current 5.05 percent figure.

It comes at a difficult time for the Treasury, as Chancellor Jeremy Hunt is preparing to deliver the Autumn Statement on Nov. 22.

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While the chancellor hasn’t confirmed tax increases in his new budget, he also hasn’t made any promises to cut tax. On the contrary, last month Mr. Hunt said that tax cuts were “virtually impossible.”

Despite public borrowing being lower than expected between April and August, it was still at £11.6 billion, the fourth highest August borrowing since monthly records began in 1993.

Public Spending

The markets also recorded an increase in yield on shorter-dated UK government bond prices. The interest rate on five-year gilts is at 4.67 percent and at 4.6 percent on 10-year gilts.

This means that the government will have to pay a higher cost for borrowing money. In turn it could impact the Treasury’s decisions on public spending, including health care and education.

These sectors have been in continuous pay talks with the government, leading to industrial action by teachers and doctors over the course of the year.

The latest strike by junior doctors and consultants kicked off on Monday and will end on Thursday, coinciding with the dates of the Conservative Party Conference in Manchester.

The Conservatives are facing a trial by fire, where they are pressed to deliver on their promise to halve inflation, keep interest rates from surging, and negotiate with the public sector over spending.

All this comes at a crucial period for the government, as it is polishing its policies ahead of the general election, to be held no later than January 2025.

National Debt

Meanwhile, the economy is suffering from a level of debt higher than in the past two years. According to the latest Office of National Statistics figures, the size of government debt was over £2.5 trillion at the end of the first quarter of the year.

This compares to over £2.2 trillion at the same time two years ago.

Britain’s pensions industry, funded by gilts, is posing another challenge to government debt.

Pension funds, along with their insurers, hold around a quarter of outstanding gilts. As the yields on government bonds increase, big asset managers turn positive on gilts.

But investors are concerned pension funds are likely to step back from gilts just as the Bank of England reduces its own holdings faster and debt issuance remains high, adding pressure to British borrowing costs.

In September, the Bank of England announced that it plans to sell £100 billion in bonds in the next 12 months, compared to £80 billion the year before.

Lily Zhou contributed to this report.