Government borrowing costs rose sharply on Tuesday as investors reacted to uncertainty over the future of Prime Minister Sir Keir Starmer.
The effective interest rate on 10-year Government borrowing briefly reached 5.13%, close to levels last seen during the 2008 global financial crisis. Longer-term borrowing also came under pressure, with the 30-year gilt yield hitting 5.81%, its highest level since 1998.
Markets were already unsettled by the Iran war, which has pushed oil prices above $100 a barrel and raised fears of higher inflation. If inflation rises further, investors may expect interest rates to stay higher for longer.
The UK, however, saw borrowing costs rise more sharply than some comparable economies, including France and Germany. Analysts said investors were also concerned that a change in Labour leadership could lead to looser public spending and higher Government borrowing.
Starmer and Chancellor Rachel Reeves have repeatedly committed to strict borrowing rules, describing them as “iron-clad”. But some Labour MPs have questioned whether the current fiscal rules are suitable for long-term renewal.
Government borrowing works through bonds, known in the UK as gilts. Investors lend money to the Government in return for interest, but demand higher returns when they see greater risk.
The market pressure has also affected other assets. The FTSE 100 fell more than 1% in early trading before closing 0.04% lower. Lloyds, NatWest and Barclays dropped amid concerns about possible tax rises under a future administration. The pound fell 0.5% against the dollar to $1.35.
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