Borrowing prices hit highest stage this yr in wake of Budget

UK borrowing costs have hit their highest levels this year as economists warned that Rachel Reeves’ borrowing binge to fund public spending will keep interest rates higher for longer.

Benchmark ten-year borrowing costs rose by almost 0.1 percentage points to 4.44pc on Thursday as nervous investors fretted about the Chancellor’s £32bn-a-year increase in borrowing, which analysts highlighted would not all be used to fund investment.  

Two-year yields, which most closely reflect bets on Bank of England interest rates, rose by a similar amount to 4.43pc, the highest since June.

Analysts at Goldman Sachs and JP Morgan said they now only expected only one more interest rate cut this year given “much higher spending” pencilled in by Ms Reeves, which will fuel inflation.

Investors also pared back bets on rate cuts following the Chancellor’s maiden Budget, and now expect benchmark borrowing costs to fall to roughly 4pc by the end of 2025, compared with 3.75pc a week ago.

Allan Monks, chief UK economist at JP Morgan, said: “The Bank will still likely cut in November even after incorporating the fiscal changes into its forecasts. 

“But we are now more confident it will hold in December, barring downside surprises in wages and services inflation. We continue to forecast rates at 3.75pc by the end of next year. That had been looking too high, but the Budget takes out a lot of the downside risk.”

He warned that Ms Reeves’ decision to fund some of her day-to-day spending commitments by borrowing more would be inflationary and require the Bank to keep rates higher for longer.

Source: telegraph.co.uk