British Pound Plummets to Nine-Month Low as Government Borrowing Costs Surge

The British pound has fallen to a nine-month low amid a significant rise in government borrowing costs, pushing Chancellor Rachel Reeves close to breaching her own fiscal rules.

Sterling declined by up to 1.2% against the US dollar, reaching $1.233—the lowest level since April—following a sharp sell-off in bond markets.

Today, the yield on the 10-year UK gilt, a key indicator of government borrowing costs, surged approximately 10 basis points to 4.81%, marking its highest level since the global financial crisis in 2008.

Long-term government borrowing costs continued to rise after hitting their highest point since 1998 on Tuesday. Additionally, the yield on inflation-linked 30-year gilts climbed to 2% for the first time since the sell-off triggered by the mini-Budget in 2022.

Economists have warned that Chancellor Reeves may need to make “economically damaging decisions” such as raising taxes or cutting spending as the cost of government borrowing continues to escalate.

The recent surge in bond yields follows the UK Debt Management Office (DMO) auctioning £4.25 billion of new debt this morning. Additionally, traders are adjusting their strategies in response to expectations that the US Federal Reserve will implement fewer interest rate cuts this year.

Economists have cautioned that Chancellor Rachel Reeves is on the verge of breaching her fiscal rules, which could force her to implement another tax increase as bond yields continue to climb.

Kallum Pickering, Chief Economist at Peel Hunt, stated, “If bond yields rise further, Reeves may be compelled to make the economically damaging decision of further increasing taxes or cutting back on planned public spending to balance the books.”

He added that the rise in bond yields “poses a significant challenge for Chancellor Rachel Reeves’ ability to meet her self-imposed fiscal rules, which include achieving a current budget surplus (excluding public investment) by 2029/30.”