The government is facing increased long-term borrowing costs, reaching their highest point since 1998 due to the aftermath of the Iran war and uncertainties surrounding PM Keir Starmer’s future. The interest rate on 30-year government bonds surged to 5.77% on Tuesday, surpassing last September’s 27-year peak and potentially inflating the government’s borrowing expenses amid economic vulnerabilities from the Middle East conflict.
Simultaneously, the UK’s FTSE 100 index experienced a dip of nearly 130 points (1.27%) to 10,232.71 by 1 pm, reflecting the market’s response. The yield on 10-year gilts, indicative of new public debt costs, also climbed above 5% to 5.095%, on track for the highest closure since 2008.
This financial trend is not unique to the UK, as US and German yields have also risen due to ongoing disruptions in the shipping industry at the Strait of Hormuz. The upcoming local elections on Thursday have added to the uncertainty, particularly concerning the Labour party’s performance and the potential implications for leadership challenges against Sir Keir.
Thomas Pugh, RSM UK’s chief economist, cautioned that a leadership change could further elevate government borrowing expenses. He emphasized the impact of political uncertainties on economic activities, potentially deterring investments and expenditures, while also projecting an increase in gilt yields if a new leader adopts a more expansive fiscal approach.
The current national debt stands at approximately £2.9 trillion, nearly equivalent to the UK’s annual gross domestic product. Elevated gilt yields will heighten the burden of servicing public sector debts, with an estimated £111 billion expenditure forecasted by the Office for Budget Responsibility in the last fiscal year.