UK borrowing costs have reached their highest point since the financial crisis, as gilts were affected by a widespread sell-off in global bond markets. The UK government is expected to incur higher debt interest payments.
The benchmark 10-year gilt yields increased by as much as 15 basis points, reaching an 18-year high of approximately 5.2 per cent. Longer term gilt yields also rose to 5.9 per cent in early trading on Tuesday.
Economist Simon French of Panmure Liberum indicated that the increase in 20-year gilt yields could impact John Healey's fiscal headroom by up to £6bn. This headroom, which was about £22.7bn before the Iran conflict, is determined by fiscal rules aiming for day-to-day government spending to match tax receipts by 2030.
The Office for Budget Responsibility's (OBR) forecasts for debt interest payments are expected to be upgraded, adding to current projections that the UK government will pay lenders up to £137bn in 2030.
Some economists have suggested the Bank of England might slow its quantitative tightening (QT) programme, potentially easing the pace of bond holding sales from £70bn to £50bn in the current year. This could help to limit upward pressure on gilt yields.
City analysts have also warned that higher gilt yields could dampen the housing market in the short term. A drop in mortgage approvals in July may signal a challenging second half of the year for the housing market, with higher borrowing costs and lower disposable income creating a difficult environment.