Long-term government borrowing costs in the UK have surged to their highest levels since 1998, presenting a significant challenge for Chancellor Rachel Reeves as interest rate reductions are expected to slow this year.
Today, the yield on 30-year UK bonds climbed to 5.22%, marking the first such increase in over a quarter of a century. A £2.25 billion issuance of long-term government debt achieved a yield of 5.2%, making Ms. Reeves the first chancellor since Gordon Brown to oversee a bond auction exceeding the 5% threshold.
This spike comes as the Bank of England is anticipated to reduce interest rates only twice this year in response to persistent inflation, which rose for the second consecutive month to 2.6% in November.
Last year saw just two interest rate cuts, contrary to earlier expectations at the beginning of 2024 that suggested up to six reductions. The Bank of England has signalled a “gradual” approach to rate cuts this year, with traders predicting that policymakers will lower borrowing costs only twice in 2025.
The increase in borrowing costs coincides with Ms. Reeves preparing to conduct a spending review for government departments.
Additionally, rising borrowing costs have pressured mortgage rates, which have climbed to an average of 5.47% today for a two-year fixed deal, making home affordability more challenging for buyers.
Data from Halifax revealed that the average house price in the UK fell for the first time in nine months in December, amid increasing mortgage rates. Amanda Bryden of Halifax stated that mortgage affordability “will remain a challenge for many, especially as the Bank Rate is likely to come down more slowly than previously predicted.”
