Bank of England Governor Andrew Bailey has urged Chancellor John Healey to agree a budget that reassures financial markets after the UK’s medium-term borrowing costs hit a fresh 19-year high.
With investors offloading government bonds previously considered safe havens amid fears of rising inflation, Bailey told all governments caught in the crosshairs of financial speculators that they needed to avoid market turmoil that raises the interest paid on debt. Recent dramatic moves in government bond markets have been driven by international factors, but will increase the pressure on Healey ahead of his tax and spending announcement on 28 October.
The yield, or interest rate, on 10-year UK government bonds had risen 0.06 percentage points by lunchtime in London, to 5.515%, marking the highest level since July 2007 during the onset of the global financial crisis. Yields on 20- and 30-year UK government bonds, known as gilts, also rose significantly to their highest level since 1998. Although yields later dropped back on a volatile trading day, analysts warned that further conflict in the Middle East could push them up again.
Meanwhile, the benchmark oil price rose by more than 5% to $105.3 a barrel amid escalating geopolitical tensions and production threats from a hurricane off the US coast. Diesel prices at UK pumps reached £2 a litre recently, intensifying central bank concerns that inflation will surge and drive up government debt financing costs.
Speaking at a conference in Istanbul, Bailey stated he would not meddle in government policy, but offered a direct observation to Healey following the bond rout. Whatever the stance of fiscal policy, he noted, it must be credible and be seen as such by financial markets. Realistic commitments to rein in debt help curb demands for higher returns from investors who might sell during economic shocks, he added.
Economists believe rising borrowing costs and weaker growth will likely have wiped out around half of the fiscal buffer built up by Healey’s predecessor, Rachel Reeves, at the spring statement. Healey is expected to raise taxes in the upcoming budget to help rebuild that cushion and fund policy interventions, though some analysts warn against going too far and damaging economic incentives.
The broader bond selloff has intensified across major economies as oil prices soar and geopolitical conflicts continue without immediate resolution. Officials and international leaders, including IMF Managing Director Kristalina Georgieva, have emphasized the necessity for policymakers to take decisive fiscal action as higher yields drive up borrowing costs for governments, homeowners, and businesses alike.