Gilt yields surge as more interest rate rises loom

Borrowing costs in Britain rose yesterday as higher-than-expected inflation data gave headaches to the Treasury and the Bank of England.

Ten-year government bond yields – a measure of what the state pays to borrow – climbed to just under 3.9 percent during the session, reaching its highest level in more than a month.

One-year bonds, meanwhile, rose above 4.5 percent, their highest level since 2008, as traders bet on further rate hikes.

The market moves came as the Office for National Statistics (ONS) said inflation fell to 10.1 percent in March, which was higher than the expected rate of 9.8 percent.

It marked a seventh consecutive month of double-digit inflation and placed the UK firmly at the back of the race to stamp out the cost-of-living crisis plaguing Western economies.

Figures elsewhere showed that inflation in the eurozone fell to 6.9 percent and in the United States, the world’s largest economy, is already at 5 percent.

“Inflation in the UK has continued to rise and remain higher than elsewhere as the UK has experienced the worst of both worlds: a major energy shock like the Eurozone and a labor shortage that is even worse than in the US,” says Ruth Gregory , Deputy Chief UK Economist at Capital Economics.

That throws the spotlight on the Bank of England, which was accused of not reacting quickly enough when signs of rising inflationary pressures first appeared a few years ago.

It eventually embarked on an aggressive series of rate hikes and is now believed to be almost certain to rise again in May and June and probably August as well.

The Bank had hoped that inflation would have fallen to 9.2 percent by now.

But the slower-than-expected progress is narrowing options for interest rate setters as they try to control inflation without crushing hopes that the economy can avoid a dreaded recession.

That will be more difficult as it increases mortgage bills by hundreds of pounds for homeowners and makes it more expensive for businesses to borrow.

This week, government figures already showed a sharp rise in corporate bankruptcies, which are at their highest level since measurements began in 2019.

The stubborn persistence of inflation also leaves Treasury Secretary Jeremy Hunt less room for maneuver.

Hunt faces demands to pay wages for striking public sector workers – and the union action is hurting Britain’s economic output.

And he is under continued pressure from Conservative MPs, unhappy that Britain’s tax burden is heading for its highest level since World War II, to cut taxes.

Hunt has consistently maintained that the government needs to stay on track and keep tight control over public finances.

Cornered: Inflation’s stubborn persistence leaves Chancellor Jeremy Hunt (pictured) less room for maneuver

But now that a general election is approaching, speculation will grow that he may try to cut taxes to improve the conservatives’ prospects.

Any giveaway will be more difficult if, as the rise in bond yields indicates, borrowing costs are rising.

There wasn’t even much cheer from the pound in the face of yesterday’s inflation numbers.

Sterling rose as much as half a penny during yesterday’s session, but later gave up most of its gains.

The FTSE 100 also pulled back to end a recent strong run.

It fell 10.67 points, or 0.1 percent, to end at 7898.77.