Treasury’s borrowing costs at highest level since 2014

THE Government’s cost of borrowing hit its highest level in eight years after the Bank of England raised interest rates and warned inflation will get significantly worse before it gets better.

Rising gilt yields pose a threat to the Treasury’s financial plans, with the cost of debt interest payments on the £2.3trillion national debt already set to hit a record high of £83bn this financial year.

The interest rate the Treasury has to pay to borrow for 10 years in the bond markets jumped briefly above 2.7pc, its highest since 2014 as traders were spooked by the Bank’s suggestion it could “act forcefully” with sharper interest rate hikes to control scorching price rises.

Two-year borrowing costs jumped even more, spiking from below 1.95pc at the start of the day to a high of almost 2.3pc, before settling back at 2.1pc.

Kallum Pickering, economist at Berenberg Bank, said the severe market reaction “seems to suggest that financial markets are now even more concerned than before that the Bank of England is behind the curve” when it comes to raising interest rates to get on top of inflation.

“Markets may have preferred the Bank to follow the Fed and pick up the pace of rate hikes,” he said, referring to the Federal Reserve’s move to raise interest rates more sharply from 1pc to 1.75pc this week.

Rishi Sunak has said one reason he needs to keep a lid on the Budget deficit is to try to hold down inflation and borrowing costs in the economy.

“I will make sure I handle our borrowing and debt responsibly so that we don’t make the situation worse and increase mortgage rates more than they would otherwise have to go up,” he said in an interview with ITV News.