Global anxiety over rising debt levels has pushed borrowing costs higher across major economies, including the United States and the United Kingdom. On Thursday, the British pound fell by 0.9% to $1.226 against the dollar, marking its lowest level in over a year. This decline coincided with a rise in UK borrowing costs to their highest in 16 years, reflecting a broader trend influenced by global market movements. Despite these challenges, the Bank of England's deputy governor Sarah Breeden described the movements in the British government bond market as "orderly."
The cost of government borrowing in the US has mirrored the UK's rise, driven by widespread concerns about debt levels. In the UK, borrowing costs jumped earlier in the day but stabilized by mid-afternoon, indicating market volatility. The Bank of England held interest rates at 4.75%, citing "heightened uncertainty in the economy" as a key reason for maintaining the current rate.
"So far the moves have been orderly. We do need to watch this space. So far, so good." – Sarah Breeden, Bank's deputy governor
The major driver of yields going higher under former Prime Minister Liz Truss was UK policy. With yields increasing, Mohamed El-Erian, chief economic adviser at asset manager Allianz, noted that higher borrowing costs mean increased interest payments on government debt, which could consume more tax revenue and leave less for other public expenditures.
"So the chancellor, if this continues, will have to look at either increasing taxes or cutting spending even more – and that's going to impact everyone." – Mohamed El-Erian, chief economic adviser at asset manager Allianz
Typically, sterling rises when borrowing costs increase. However, economists have highlighted broader concerns about the strength of the UK economy as a factor driving the currency lower. These concerns are compounded by recent economic data showing zero growth between July and September 2024 and revised figures suggesting worse-than-expected performance in the last quarter of that year.
UK borrowing costs reaching a 16-year high has prompted criticism from some quarters. Mel Stride, shadow chancellor, argued that the government's approach to borrowing is counterproductive.
"The government's decision to let rip on borrowing means that their own tax rises will end up being swallowed up by the higher borrowing costs at no benefit to the British people." – Mel Stride, shadow chancellor
Danni Hewson, head of financial analysis at AJ Bell, expressed concern over the implications for public spending amidst these financial challenges.
"It may be a global sell-off, but it creates a singular headache for the UK chancellor looking to spend more on public services without raising taxes again or breaking her self-imposed fiscal rules." – Danni Hewson, head of financial analysis at AJ Bell
The government has refrained from revealing any decisions on spending or taxes before an official borrowing forecast from its independent forecaster due in March. Meanwhile, Treasury minister Darren Jones emphasized that no emergency intervention is necessary at this stage.
"No need for an emergency intervention." – Darren Jones, Treasury minister
Jones also pointed out that fluctuations in gilt prices and yields are typical in response to global financial market movements and economic data.
"It is normal for the price and yields of gilts to vary when there are wider movements in global financial markets, including in response to economic data." – Darren Jones, Treasury minister