On Tuesday, the UK government paid the highest interest rate on a 30-year bond since 1998, highlighting the fiscal challenges facing Chancellor John Healey.
The Treasury paid 5.82% to borrow £4bn, echoing a global bond market sell-off that has pushed up yields on government borrowing across major markets.
That was the highest rate since the Debt Management Office, which handles government borrowing, was set up in 1998. On Monday, Healey used a speech in Coventry to stress his determination to balance the books.
Markets have been rattled by fears of a fresh inflation rise after the Middle East conflict resumed and pushed up oil prices, and by investor worries about rising public debt.
When the Office for Budget Responsibility issues its latest forecast before the budget on 28 October, higher borrowing costs are expected to erase at least half of the £24bn headroom that Healey’s predecessor, Rachel Reeves, built up in her spring forecast in March.
The costly debt auction came as Bank of England governor Andrew Bailey told MPs that the latest oil price rise was also putting pressure on inflation and interest rates.
“The risks, I’m afraid, are on the upside,” he said. “And that’s really the risks coming from energy prices.”
Bailey insisted there was no secret plan to raise interest rates, and stressed that higher borrowing costs had already affected consumers without the Bank needing to act.
“UK mortgage rates now are typically at the moment about a three-quarters of a percent higher than they were at the point when the conflict broke out,” he said. “I think with the possible exception of Japan, although that’s a little hard to map, that’s the largest increase in mortgage rates in the G7.”
Brent crude traded at about $97 a barrel on Tuesday. Bailey said the oil price could rise further, with the Strait of Hormuz still largely closed to tanker traffic and Ukraine attacking refineries in Russia.
Bailey appeared before the Commons Treasury select committee with three fellow members of the Bank’s monetary policy committee, which meets next week to set interest rates.
Megan Greene, who voted for a rate rise in July as part of the minority, said she remained concerned about the risks of acting too late against inflation. But Dave Ramsden and Alan Taylor, who did not back a rate rise, suggested prices had risen less than feared as a result of the Iran war.
