Gilt yields surge as more interest rate rises loom

Borrowing costs in Britain rose yesterday as higher than expected inflation figures created a headache for the Treasury and the Bank of England.

The yield on benchmark ten-year Government bonds – a measure of what the state pays to borrow – climbed to just under 3.9 per cent during the session to hit their highest level for more than a month.

One-year dated bonds meanwhile climbed to more than 4.5 per cent, the highest level since 2008, as traders bet on more interest rate increases to come.

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

It meant a seventh month in a row of double-digit inflation and put the UK firmly at the back of the race to banish the cost of living crisis that has been stalking western economies.

Figures elsewhere showed that eurozone inflation fell to 6.9 per cent and it is already down at 5 per cent in the United States, the world’s biggest economy.

‘Inflation in the UK has risen further and stayed higher than elsewhere as the UK has experienced the worst of both worlds: a big energy shock like the eurozone and labour shortages even worse than the US,’ said Ruth Gregory, deputy chief UK economist at Capital Economics.

That intensifies the spotlight on the Bank of England, which has been accused of failing to respond quickly enough when signs of burgeoning inflation pressures first appeared a couple of years ago.

It eventually embarked on an aggressive series of rate hikes and is now seen as almost certain to go for increases again in May and June and probably also August.

The Bank had hoped that inflation would be down to 9.2 per cent by now.

But the slower-than-hoped-for progress narrows the options for rate-setters as they try to keep a lid on inflation without crushing hopes that the economy can avoid a feared recession.

That will be tougher as it puts up mortgage bills by hundreds of pounds for home owners and makes it more expensive for companies to borrow.

Already this week, Government figures showed a sharp rise in company insolvencies, which are at their highest level since records began in 2019.

Inflation’s stubborn persistence also leaves Chancellor of the Exchequer Jeremy Hunt with less room for manoeuvre.

Hunt is facing demands to put up pay for striking public sector workers – and the industrial action is dragging on Britain’s economic output.

And he is under consistent pressure from Conservative MPs, unhappy that the UK tax burden is heading for its highest level since the Second World War, to cut taxes.

Hunt has consistently maintained that the Government must stay the course and keep a tight rein on public finances.

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

But with a general election creeping ever closer speculation will grow that he may seek to cut taxes to boost the Conservatives’ prospects.

Any giveaway will be harder if, as the increase in bond yields signals, borrowing costs are rising.

There was not even much cheer from the pound in the face of yesterday’s inflation figures.

Sterling was up by as much as half a cent in yesterday’s session but later gave up most of its gains.

The FTSE 100 also retreated to end a recent strong run.

It was down by 10.67 points, or 0.1 per cent, to close at 7898.77.