UK government borrowing costs hit highest since 2008 as inflation fears impact the gilt market

UK Government Borrowing Costs Hit Highest Since 2008

The UK government's borrowing costs have surged to levels not seen since the 2008 financial crisis, with the benchmark 10-year gilt yield crossing 5% as investors prepare for rising inflation and potential interest rate hikes from the Bank of England. The surge has been attributed to fears stemming from the ongoing US-Iran conflict, which has disrupted energy markets and contributed to higher oil and gas prices.

Markets have rapidly re-evaluated expectations around monetary policy, with many now anticipating a near 0% chance of a rate cut by the Bank of England this year. Instead, traders are increasingly expecting at least two significant rate hikes, with the key rate likely to reach at least 4.25% by the end of the year.

Nigel Green, CEO of financial advisory firm deVere Group, highlighted that 'this isn't a disorderly sell-off — it's an understandable repricing of risk.' He also noted that there is a political layer to these market movements, with Finance Minister Rachel Reeves' fiscal policies coming under scrutiny as borrowing costs rise.

Official figures reveal that the UK government borrowed £14.3 billion in February, exceeding initial expectations. Reeves has committed to reducing public debt as a share of economic output by 2029-30 and bringing daily government spending to levels funded by taxes rather than borrowing.

George Godber from Polar Capital advised calm investment strategies given the deep uncertainty surrounding the impact of the conflict on global markets.