The Bank of England’s governor has called on the chancellor to present a budget capable of stabilizing financial markets following a sharp rise in the UK’s medium-term borrowing costs. Ten-year government bond yields reached their highest level since July 2007, while longer-dated bonds hit levels not seen since 1998, driven by international factors including Middle East tensions and rising oil prices.
The yield increases reflect broader market anxiety about inflation becoming entrenched across major economies. Oil prices surged more than 5% to $105.3 a barrel due to regional conflicts and production constraints from an approaching hurricane off the US coast. Diesel prices at UK pumps reached £2 a litre, prompting central banks worldwide to consider inflation risks. The governor emphasized that government fiscal policy must be perceived as credible by investors to help prevent bond selloffs triggered by external shocks.
The rising borrowing costs and weaker economic outlook are expected to have substantially eroded the fiscal buffer that the previous chancellor had established. The upcoming budget announcement on 28 October will likely involve tax increases to rebuild this cushion while funding policy priorities including electricity bill support measures. Some economists caution against excessive focus on restoring the fiscal buffer, arguing that gilt yields may decline within the year as the Bank of England may make fewer rate increases than currently anticipated.
The bond market turbulence has affected governments globally, with France experiencing particularly acute pressure as investors worry about budget deficits and political risks. European central banks and finance ministers are preparing to encourage Paris to pass a credible budget. The International Monetary Fund’s managing director has urged governments worldwide to implement necessary policy adjustments rather than delay action. US Treasury officials have pursued buyback programs to stabilize their long-term borrowing costs, though these efforts have shown limited effectiveness so far.
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