Oil-driven inflation fears push UK borrowing costs towards 19-year high

UK government borrowing costs climbed towards a 19-year high on Thursday as investors sold sovereign bonds amid concerns that the Middle East conflict would keep energy prices and inflation elevated. The Guardian Economics reported that the yield on 10-year gilts reached 5.38% by mid-morning, adding pressure on John Healey before next month’s budget.

The rise makes government investment more expensive upfront and affects the Office for Budget Responsibility’s assessment of compliance with Labour’s fiscal rules. According to analysts cited by the Guardian, recent yield increases have eliminated more than half of the £24bn margin against those rules that former chancellor Rachel Reeves established at the March spring statement.

Healey has pledged to retain a cushion against uncertainty, although it is widely expected to fall well short of £24bn. Restoring that margin would probably require substantial tax rises or spending reductions. Treasury sources told the Guardian that the budget would have a limited focus, with major spending choices deferred until a review next year.

The energy outlook remains central to the pressure on borrowing costs. Bank of England chief economist Clare Lombardelli told a conference in Warsaw on Thursday that a prolonged period of high oil prices caused by the Iran war would increase the likelihood of UK interest rate rises. She warned that persistent energy costs could influence inflation expectations, wage negotiations and businesses’ pricing decisions, making tighter policy more likely unless inflation eased or economic activity weakened.

Lombardelli said the spillover from expensive oil into other prices had so far been smaller than the Bank anticipated. Nevertheless, the Bank expects the quarterly household energy price cap to rise by 24% in January if oil prices stay high, the Guardian reported. Any interest rate increase would also raise mortgage costs. The monetary policy committee held rates at 3.75% last week.

The sell-off extended beyond Britain, with 30-year US Treasury yields reaching 5.444% on Thursday, their highest since 2004. Alongside inflation worries, the Guardian reported investor concerns over US government spending. Some analysts also suggested that heavy bond issuance by artificial intelligence companies was weakening demand for Treasuries.