Long-term government borrowing costs in the UK have surged to levels not seen in 26 years, driven by rising inflation and waning expectations of significant interest rate cuts in 2024.
The yield on 30-year UK government bonds, also known as gilts, climbed to 5.16% following the release of data showing inflation increased to 2.6% in November.
This marks the seventh consecutive day of rising gilt yields, placing them on course for their highest closing level since 1998.
Interest Rate Cut Projections Shift
The surge comes as money markets revise their expectations for interest rate cuts by the Bank of England. While four cuts were previously anticipated, the outlook now points to just two reductions next year due to concerns about persistent inflation.
Guillaume Derrien, senior economist at BNP Paribas, commented:
“This week’s economic indicators, including November’s inflation uptick, have intensified fears that overly restrictive monetary policies could hinder economic recovery.”
Market Impact
The increase in borrowing costs has pressured stock markets, with the FTSE 100 falling by as much as 1.1%, positioning it for its worst week in 16 months.
This development caps a volatile week for global markets, as central banks in both the UK and the US reassess their monetary policies amid mounting inflationary pressures.
Bank of England Holds Rates Steady
The Bank of England kept interest rates unchanged at 4.75% on Thursday. Governor Andrew Bailey signalled a cautious approach to future cuts, citing “heightened uncertainty in the economy.”
This decision followed inflation data revealing a consecutive monthly increase for the first time in two years.
Matthew Ryan of Ebury noted a growing divide among policymakers:
“Officials at the Bank appear more divided than ever on the path ahead for UK interest rates,” with three members of the Monetary Policy Committee advocating for an immediate rate reduction this week.
US Federal Reserve Takes Cautious Steps
Across the Atlantic, the US Federal Reserve reduced interest rates this week but scaled back its projections for 2024, now predicting only two additional cuts compared to four anticipated three months ago.
Meanwhile, the Fed’s preferred inflation measure—the Personal Consumption Expenditures (PCE) index—rose less than expected in November.
Looking Ahead
Money markets suggest the Federal Reserve may delay its next rate cut until June, while the Bank of England could hold off until May.
This cautious stance reflects ongoing concerns about inflation and the delicate balance central banks must maintain to support economic stability.
