Fears over the British economy falling into a long recession and the likelihood of higher public spending to cope with the cost of living crisis has sent the interest rate on Britain’s debts soaring towards its biggest monthly rise in almost 40 years.
Ten-year UK government bond yields, which are a proxy for the effective interest rate on public borrowing – were on course on Wednesday for the biggest monthly rise since September 1986 after an increase to 2.78%.
Heaping pressure on the incoming prime minister to address the Treasury’s worsening financial outlook, some analysts predicted the yield would increase before the end of the year to at least 3%.
It comes as Rishi Sunak warned there were growing risks of financial markets losing faith in the British economy amid soaring inflation and elevated levels of government debt, in an attack on his Conservative leadership rival Liz Truss’s tax and spending plans.
About a third of the UK’s total borrowings have an interest rate linked to inflation, making them more expensive to finance in a period of rising prices.
Truss, the frontrunner in the race to succeed Boris Johnson, has been criticised by opposition parties for proposing £50bn worth of tax cuts that will boost the incomes of rich and poor households and profitable companies over the next year.
Sunak said he “struggled to see” how sweeping tax cuts to support families with the cost of living crisis “add up”. Using an interview in the Financial Times, he warned it would be “complacent and irresponsible” to ignore the risk of losing financial market confidence in Britain.
“We have more inflation-linked debt by a margin than any other G7 economy –– basically more than double,” he said.
The pressure on the government’s borrowing
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