Rachel Reeves has been dealt her biggest crisis yet after UK borrowing costs hit their highest level in nearly 30 years. Donald Trump’s tariffs continued to unleash panic across markets on Wednesday as China and the EU announced further retaliatory measures.
The international chaos has driven government borrowing costs, or gilts, to a new high not seen since 1998. Yields on 30-year gilts rose to 5.65%, a level last seen 27 years ago, while 10-year yields also spiked. This is higher than in January this year, when the cost of government borrowing rose even higher than the level seen following Liz Truss’s mini-Budget.
The rise in the cost of UK debt forced Ms Reeves to announce major spending cuts in last week’s spring statement.
The latest news will be an even bigger headache for the Chancellor, who may now be forced to make further cuts in the Budget later this year – potentially sparking claims of broken promises after Labour pledged an end to austerity.
Treasury yields shot up largely as a result of Mr Trump whacking China with new 104% tariffs. The world’s second-largest economy hit back with reciprocal 84% tariffs.
The cost of government borrowing has historically tracked the cost of US government borrowing, which has similarly risen over the past week.
Chris Beauchamp, chief market analyst at IG Group, explained: “While this is nothing compared to the mini-Budget-induced surge of 2022, it certainly piles on the pressure for Rachel Reeves.”
“She can legitimately point to the crisis being manufactured in the US, but that is small comfort when the UK economy may well be on its way to a recession.
“The Government will find its room for manoeuvre limited unless the Chancellor drops her fiscal rules.”
Earlier on Wednesday, Sir Keir Starmer said an economic deal with the US would not be “enough” for Britain. The Prime Minister said the Government will look to improve trade relations around the world to offset the president’s tariffs.
When asked if the 10% tariffs on all UK exports to the US would be in place forever, Sir said he did not know.
He added: “We are negotiating and we hope to improve the situation, but what I mean by this is that simply thinking that any change in the rates, or any deal is going to be enough, to my mind is wrong.
“Because just as we’ve done with defence and security, where we’ve recognised it’s a changing world, we’ve got to step up and act differently.
“In that case with defence spend, co-ordinating better across Europe, so too with trade and the economy.”
Both Sir Keir and Ms Reeves have insisted the Government will stick to its fiscal rules come what may, reducing its flexibility to deal with the economic turmoil.
