Government borrowing costs hit a 15-year high yesterday as traders bet interest rates would reach 6 per cent by Christmas.
On another turbulent day on the bond markets, the yield on two-year gilts rose above 5 per cent for the first time since 2008.
At one stage, they were as high as 5.085 per cent.
That compares with a yield of just over 3 per cent four months ago and zero in early 2021.
Gilt yields – a key measure of what it costs the Government to borrow – are a major driver of mortgage rates, and figures yesterday showed the cost of a typical two-year fix was more than 6 per cent.
Hikes: Gilt yields have risen sharply since the Bank of England started increasing interest rates 18 months ago in its battle to tame inflation
Yields have risen sharply since the Bank of England started increasing interest rates 18 months ago in its battle to tame inflation.
They spiked higher in the wake of the Liz Truss mini-Budget in September last year as investors fretted over the cost of tax cuts and schemes to help households with soaring energy bills.
With Prime Minister Rishi Sunak and Chancellor Jeremy Hunt vowing to restore order after taking over from Truss and her chancellor Kwasi Kwarteng, yields then dropped again.
But the two-year gilt yield is now well above Truss-era levels as the Bank struggles to contain runaway inflation.
It still stands at 8.7 per cent despite 12 interest rate hikes in 18 months – from 0.1 per cent to 4.5 per cent.
Official figures tomorrow will reveal whether inflation fell any further in May, having peaked at 11.1 per cent last year.
The Bank – which is tasked with keeping inflation at 2 per cent – is widely expected to raise interest rates again on Thursday to 4.75 per cent before a string of further hikes over the rest of the year.
Traders expect rates to hit 6 per cent by the end of the year – a level not seen since 2001 – while the chances of a 0.5 percentage point hike to 5 per cent this week are now put at 30 per cent by the markets.
The surge in interest rates has pushed up the cost of borrowing for the Government, households and businesses.
Analysts warned that rates may have to rise so high to tame inflation that Britain will be plunged into recession as higher borrowing costs take their toll.
‘We suspect inflation will drop all the way to 2 per cent only if the Bank of England triggers a recession by raising interest rates from 4.5 per cent now to a peak of 5.25 per cent, and keeps interest rates there until the second half of 2024,’ said Paul Dales, chief UK economist at Capital Economics.
Yields for longer-dated gilts, which are not so sensitive to rate expectations, were also up, but not by as much.
Ten-year gilt yields rose to 4.49 per cent, while 30-year gilt yields were 4.55 per cent.
Sunak yesterday ruled out offering financial support to those struggling with mortgages.
‘I know the anxiety people will have about the mortgage rates,’ the Prime Minister said.
‘That is why the first priority I set out at the beginning of the year was to halve inflation, because that is the best and most important way that we can keep costs and interest rates down for people.’
