(qlmbusinessnews.com . Thurs 9th Jan, 2025) London, UK —
“Stagflation Fears Loom as UK Borrowing Costs Soar in 2025”
The UK government faces mounting economic challenges as borrowing costs climb to their highest levels in decades, threatening its ability to meet fiscal targets. Economists have warned that soaring interest rates on long-term government bonds may lead the Office for Budget Responsibility (OBR) to project that Chancellor Rachel Reeves is on track to miss the government's key fiscal rules.
The yield on 30-year gilts reached 5.35% on Wednesday, marking a high not seen since August 1998. Similarly, 10-year bond yields surged to 4.784%, the highest since October 2008. These increases could force the government to revise its financial outlook when the OBR updates its forecast in March.
The UK government, which frequently spends more than it collects in taxes, relies on borrowing to fill the gap. Borrowing is typically secured through bonds—financial instruments promising future repayment with interest. While UK government bonds, or “gilts,” are traditionally regarded as low-risk, rising yields indicate heightened market concern about the country’s financial health and inflationary pressures.
Servicing the national debt already accounts for 7% of public spending. However, this projection was based on lower borrowing rates, underscoring the potential strain on government finances as interest rates rise.
In a recent £2 billion auction of 30-year gilts, the Debt Management Office paid an effective interest rate of 5.18%—the highest since 1998. Analysts suggest that the global financial markets, including those in the UK and the US, are reacting to high inflation and substantial bond issuance, which have driven yields upward.
Though these rates do not yet significantly affect household or corporate borrowing, prolonged increases could lead to broader economic consequences. Stubborn inflation and stagnant growth have raised concerns of “stagflation,” complicating the government's fiscal strategy.
Downing Street reiterated its commitment to economic stability, stating that meeting fiscal rules remains “non-negotiable.” Any required adjustments are likely to involve further spending cuts rather than a supplementary Budget.
With global markets grappling with volatility, the UK's borrowing landscape is shifting dramatically, raising questions about its ability to maintain economic stability amid heightened inflationary pressures and subdued growth.
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