Government borrowing costs near 5% ahead of base rate hike

Cost of government short-term borrowing nearly 5%, higher than during the mini-budget crisis as investors prepare for a hike in base rates

  • An increase of 25 basis points to 4.75% is expected, but if the CPI comes out high, it could be 50 basis points
  • Market price final rate of 5.7%, but UBS says unlikely

Government borrowing costs have continued to rise ahead of another hike in key interest rates when the Bank of England’s Monetary Policy Committee meets later this week.

Yields on two-year government bonds are now reaching 5 percent, after rising more than 100 basis points in the past month alone, surpassing levels seen during the aftermath of the mini-Budget chaos, which saw yields peak at 4 .64 percent.

With an increase of 6 basis points to 4.98 percent in early trading on Monday, the move confirms expectations that the BoE will opt for another 25 basis point hike in key rates to 4.75 percent on Thursday.

Longer-dated government bonds are also trading lower, with five- and 10-year yields up 6 basis points and 5 basis points respectively.

Governor of the Bank of England Andrew Bailey

With yields of 4.63 and 4.46 percent respectively, this suggests that markets expect base rates to remain elevated for longer.

The BoE has already raised its base rate 13 times in a row in an attempt to tackle consumer price inflation.

Two-year interest rates continued to rise and are now higher than they were at the time of the mini-Budget Crisis

Two-year interest rates continued to rise and are now higher than they were at the time of the mini-Budget Crisis

New inflation data for May from the Office for National Statistics on Wednesday will provide more insight into how the walking cycle has fared in tackling inflation.

Katharine Neiss, European chief economist at PGIM Fixed Income, warned it ‘should be more powerful than expected’, it is ‘possibly up 50 basis points’ [to 5 per cent] sits in the frame.

She added: “The recent data flow is in stark contrast to what we are seeing in the US and the euro area, where both headline and core inflation are falling.

“The US is dealing with an overly hot labor market, while the euro area is still feeling the after-effects of the energy shock rippling through other non-energy goods and services.

However, the UK is affected by both – a double blow to inflation. All this suggests that the UK has a bigger inflation problem than its peers, which is why the market is now pricing in further rate hikes.”

Government borrowing costs have been rising continuously for some time as the level at which base rates will peak is consistently reassessed.

They were driven higher last week as ONS data showed unemployment fell and wages continued to rise.

Two-, five- and ten-year interest rates have risen by 280 basis points, 243 basis points and 196 basis points over the past year.

Base interest rate hikes have caused mortgage costs to rise to what some say are unsustainable levels, with the average two-year fixed mortgage rate now exceeding 6 percent

And those problems could deepen as markets price in even more pain, reaching a peak base rate of 5.7 percent by December.

Analysts at UBS, however, said that would amount to 118 basis points of gains between now and the end of the rip and “looks outrageous and is…well above our expectations.”

They added: ‘While we recognize the challenging inflation outlook in the UK (and globally), we see indications that wage and price pressures could gradually ease.

The BoE itself has repeatedly argued that the impact of past rate hikes has yet to hit the economy.

“Against this backdrop, we currently place a relatively low probability on a scenario in which the BoE extends its hiking cycle beyond September.”