The government is experiencing a surge in long-term borrowing costs, reaching levels not seen since 1998 due to the aftermath of the Iran conflict and uncertainties surrounding the future of PM Keir Starmer. On Tuesday, the interest rate on 30-year government bonds rose to 5.77%, surpassing last September’s peak and potentially increasing the government’s borrowing expenses amid economic vulnerabilities stemming from the Middle East crisis.
Additionally, the UK’s FTSE 100 index dropped by nearly 130 points, equivalent to 1.27%, to 10,232.71 by 1 pm. Concurrently, the yield on 10-year gilts, reflecting new public debt costs, climbed above 5% to 5.095%, aiming for its highest closure since 2008.
The global trend of rising yields extends to the US and Germany, influenced by ongoing disruptions in the Strait of Hormuz. Uncertainties loom, particularly regarding the upcoming local elections and their potential impact on the Labour party. Investors are wary of a potential challenge to Sir Keir’s leadership if Labour’s performance falters this week.
Thomas Pugh, chief economist at RSM UK, cautioned that a leadership change could further elevate government borrowing expenses. He highlighted the resurgence of political risks amidst the upcoming elections, potentially leading to increased uncertainty for businesses and households, consequently delaying investments and spending.
The escalating concerns surrounding a leadership contest could trigger speculation on tax hikes and subsequent budget adjustments, compounding the economic challenges posed by higher energy prices and potentially stalling growth further.
The national debt, currently standing at approximately £2.9 trillion, nearly equals the UK’s annual gross domestic product (GDP). The escalating gilt yields are amplifying the costs of servicing public sector borrowing, which was estimated at £111 billion in the last financial year by the Office for Budget Responsibility.
