Borrowing costs rocket on fresh interest rate hike fears
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Borrowing costs skyrocket on new fear of rate hikes: central banks battle inflation despite recession risk
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Government borrowing costs rose sharply around the world as investors turned to more aggressive rate hikes despite the risk of a recession.
On another day of financial market turbulence, with the pound bottoming out against the dollar, bond yields rocketed in the UK, US and across Europe.
Bond yields – the interest that investors charge for loans to governments – have been rising for months as central banks raise interest rates to bring inflation back under control.
On another day of financial market turmoil, with the pound bottoming out against the dollar, bond yields rocketed in the UK, US and across Europe
But particularly big strides have been made in Britain since Chancellor Kwasi Kwarteng announced £45 billion in tax cuts last week, in addition to helping households and businesses with energy bills.
When the pound fell below $1.04 before recovering, yields on 10-year British gilts soared above 4.2 percent, to their highest level since 2010.
Two- and five-year government bond yields were the highest since 2008. At the same time, borrowing costs in Germany rose to their highest level since 2008, while Italy, where a right-wing coalition emerged as the winner in Sunday’s elections, experienced an unprecedented level since 2013.
There were also big moves in the US, with government bond yields hitting a new 15-year high. Central banks around the world have raised interest rates in their battle against skyrocketing inflation. More hikes are expected in the US, UK and the eurozone in the coming months.
The Bank of England’s Monetary Policy Committee (MPC) has raised interest rates from 0.1 percent in December to 2.25 percent today.
It is believed that rates in the UK could reach 6 percent next year as the Bank is forced to take even tougher measures following the pound collapse and the Chancellor’s tax cuts.
Sterling’s decline has even sparked speculation about an emergency rate hike for the next meeting in early November – possibly this week.
But yesterday, banking governor Andrew Bailey said he was “watching developments very closely in light of the significant price revision of financial assets.”
He added: “The MPC will not hesitate to change interest rates as much as necessary to bring inflation back to the 2 percent target.”
The lack of immediate action caused the pound to fall again and sparked fresh criticism of the Bank, which was accused of being too slow to tackle inflation.
Last week, many observers expected interest rates to rise by 0.75 percentage point. But the Bank opted for a more modest increase of 0.5 percentage point.
Victoria Scholar of Interactive Investor said: ‘The statement, which was intended to contain further losses for sterling, in fact did exactly the opposite.
Currency traders sold the pound after the release with a sense of disappointment that more aggressive action was not taken. It looks like an emergency rate increase is off the table for the time being.’
Speaking of the 0.5 percentage point rate hike last week, she added: “That was undoubtedly a mistake.
The Bank should have taken the more aggressive approach to fighting inflation as the economy was poised for further upward price pressures after the sterling collapse.’