Borrowing costs surge as Bank pushes bond sell-off

Gilt yields jump past 3.5pc and pound plummets in blows to Kwarteng as he prepares to unveil tax cuts

PUBLIC borrowing costs have jumped to their highest level since 2011 as markets brace for a record flood of debt from £40bn of gilt sales by the Bank of England and Kwasi Kwarteng’s sweeping tax cuts.

Gilts suffered their worst day since the pandemic started after the Bank of England voted to raise interest rates by 0.5 percentage points and pressed ahead with plans to sell government bonds.

The pound also fell by 0.9pc against the dollar, dropping under $1.13 amid fears that the Bank had done too little to bring inflation down from 40-year highs.

The Bank will begin to reverse the bond-buying blitz – known as quantitative easing (QE) – that it launched to shore up the economy during the financial crisis and the Covid pandemic, by selling gilts from next month.

Its move will create a headache for Mr Kwarteng, the Chancellor, as he embarks on a borrowing binge with a raft of announcements today. A cut to National Insurance, cancellation of corporation tax rises and a massive subsidy for energy bills are expected to drive up borrowing to £100bn a year according to the Institute for Fiscal Studies.

The Bank raised interest rates for a sixth time this year to a post-financial crisis high of 2.25pc, even as the ratesetters warned the UK economy is already in recession.

It came as Gfk’s household confidence gauge crashed down to a new record low, revealing deep pessimism among consumers over their personal finances for the next 12 months.

The reversal of QE just as the Government ramps up bond issuance means investors will buy a record amount of UK sovereign debt next year, a glut that will push state borrowing costs even higher.

Rate-setters will reduce the Bank’s huge balance sheet of government bonds by a total of £80bn over the next 12 months, including £40bn through sales. It will begin selling the £857bn of debt left over from huge amounts of QE on Oct 3.

The 10-year gilt yield rocketed past 3.5pc for the first time since 2011 following the Bank’s meeting yesterday as the UK was hit hardest in a global bond rout. UK borrowing costs have risen faster than any other major country in the last month as market jitters over the new Government’s more relaxed fiscal policy mount.

Some analysts had raised doubts over whether the Bank would push ahead with bond sales under quantitative tightening (QT) after the recent plunge in gilts fuelled by fears of excessive borrowing.

However, the Bank has revealed that around half of the £80bn bonds will mature over the next 12 months and not be reinvested. About £40bn of gilts will be sold, including almost £9bn in the final three months of 2022.

Allan Monks, economist at JP Morgan, said: “There had been more uncertainty about this in light of significant and unanticipated new government issuance in the coming months. But ultimately the size of the sales at around £10bn per quarter was deemed small enough (by design) to minimise any potential conflict with the DMO [Debt Management Office].”

James Smith, economist at ING, said the fiscal bazooka fired by Ms Truss’s Government and the bond sale “mean private investors will have to absorb a record amount of gilts”.

The Bank’s rate-setters unanimously voted to push ahead with the gilt sales despite highlighting the “sharp increase in government bond yields globally” and the faster rises in UK yields since the previous meeting.

Threadneedle Street also put more upward pressure on borrowing costs by pushing up interest rates by a further 0.5 percentage points to 2.25pc.

QE calmed UK bond markets when the pandemic struck by snapping up huge amounts of gilts. However, gilt yields have risen rapidly in recent months as the Bank increases interest rates and market jitters emerged over the UK’S fiscal policy under Ms Truss.