UK borrowing costs have just hit their highest level since the financial crisis, in the latest blow for the UK’s increasingly beleaguered Chancellor. As I write this, 30-year gilt yields have just hit 5.5%. That’s almost 20% higher than when Labour took power just over a year ago.
Incredibly, that’s the highest level since 1998. Ten-year gilt yields stand 4.648%, which is higher than during the financial crisis in 2008. For a country with a massive £3trillion debt pile, that’s punishing.
And there’s little Rachel Reeves can do to stop it, because the trigger lies in Washington. I warned there was a US storm heading our way a few days ago, and it’s already landing.
Donald Trump’s tariffs are now pushing up US inflation, and UK bond markets are feeling the shock.
Last night brought the news Reeves must have dreaded. US producer prices rose 3.3% in July, far above the 2.5% forecast, with tariff-hit metals and food leading the surge.
US businesses are companies are now starting to pass the costs on to domestic consumers, and there’s a lot more of that to come.
Where US inflation goes, ours tends to follow – and so do the rates we pay on our debts.
Britain is especially exposed. More than a quarter of our government bonds are inflation-linked, the highest proportion in the world.
So rising inflation feeds directly into higher interest bills on our massive debt pile.
The UK borrowed £20.7billion in June alone and will rack up more than £100billion of new debt over the next year.
Every penny will add to the deficit. It’s already £44.5billion for the year to June, £6.5billion worse than the year before.
Reeves was already facing a £51billion hole in the public finances. Now Trump’s tariffs have made filling it even harder.
Britain’s borrowing costs were already inflated because global investors don’t trust our public finances.
Germany pays just 3.2% on its 30-year bonds, a gap that drains tens of billions from our budget each year. Reeves needs to close that gap, but instead it’s getting wider.
The comparison with Liz Truss is unavoidable.
Her brief time in Downing Street sent gilt yields to 4.852% and helped topple her government. Today, they’re 13% higher than that. And that’s despite the Bank of England cutting rates five times since Reeves took office.
The extra cost is crippling. The Chancellor’s own mistakes have left her vulnerable, and now she is at the mercy of global markets – and Donald Trump.
This is a numbers game, and right now the totals are moving in all the wrong directions. If gilt yields climb much higher, her number is surely up.
