The pound fell 0.9% to $1.226 on Thursday as concerns over the UK’s public finances mounted. This came after 10-year Government borrowing costs soared to their highest level since the 2008 financial crisis. Economists have warned that these rising costs could pressure the Government to raise taxes or cut spending to meet borrowing targets.
On Tuesday, the cost of borrowing over 30 years hit a 27-year high. However, the Government has deferred commenting until the official borrowing forecast, which is due in March.
Typically, the pound strengthens when borrowing costs rise, but economists pointed to broader worries about the UK economy as the reason for its decline.
To fund spending beyond what it collects in taxes, the Government issues bonds, which are repaid with interest. In recent months, borrowing costs have increased globally, partly due to investor concerns over US inflationary pressures linked to President-elect Donald Trump’s tariff plans.
Simultaneously, worries about growing US debt and stubborn inflation have kept borrowing costs elevated. On Wednesday, US 10-year bond rates surged past 4.7%, their highest since April, before easing slightly later.
The UK also feels the effects as shifts in US bond markets ripple globally. These developments underline the fragility of public finances and highlight the challenges Governments face in navigating uncertain economic conditions.
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