Borrowing costs

Public borrowing costs soar as markets punish Kwarteng

UK government borrowing costs soared above 4% for the first time in more than a decade as a historic rout in bond markets following the Kwasi Kwarteng mini-budget deepens.

Investors continued to dump Britain’s debt on Monday morning after spooked by the Chancellor’s plans to increase borrowing to pay for £45billion in tax cuts and growing expectations of rapid interest rate hikes interest of the Bank of England.

The benchmark 10-year gilt yield jumped 0.35 percentage points to a 12-year high of nearly 4.2% and is on track for the biggest one-month rise since at least 1957. The two-year yield climbed a further 0.5%. percentage points to 4.4%

The huge jump in recent days will increase the cost of borrowing for the government at a time when it plans to sell an additional £72billion of gilts to pay for the tax cuts. The Chancellor refused on Sunday to bow to market pressure, signaling he wanted to make more tax cuts to boost growth.

Investors are growing increasingly concerned about the new riskier stance of UK fiscal policy, sending gilt yields soaring and triggering a fall in the pound to record lows.

The cost of insuring against the UK government’s default on its debt has also soared in recent weeks amid jitters over the shift in fiscal policy. Credit default swaps hit their highest level since the early stages of the pandemic, with costs more than doubling since mid-August.

Britain’s debt sell-off was fueled by market fears that the Bank of England might be forced to raise interest rates above 5% to combat the inflationary effects of Mr Kwarteng’s package. It comes as the Bank also plans to sell around £40bn of UK bonds bought in quantitative easing over the next 12 months.

City analysts have warned that the harsh market reaction to the mini-budget could force the Bank of England to make an emergency interest rate hike in the coming days to calm markets.

Paul Dales, UK economist at Capital Economics, said: “By advancing much of the policy tightening that might have taken place anyway, the Bank would demonstrate unequivocally that whatever the government does will ensure that inflation will return to 2% This would go a long way in mitigating the crisis.

“A common thread here is that across the board, the UK will face higher interest rates, lingering concerns over long-term fiscal sustainability and the gradual realization that a period of Tighter fiscal policy will be needed later.”