UK ten-year gilt yields have climbed the most since Liz Truss's mini-Budget after the US and Israel's initial strike on Iran, according to multiple reports. The US-Iran conflict in the Middle East has triggered a sharp rise in oil and gas prices due to Iran's control over a vital shipping lane in the Persian Gulf, multiple reports indicate. Europe's natural gas prices have climbed 54% since the US's first strikes on the region, and Brent Crude has risen over 40%, according to multiple reports. The price of Brent crude remained above $110 a barrel, research shows. The IMF warned that the UK is especially exposed to an energy shock similar to 2022 due to its reliance on gas-fired power, according to the International Monetary Fund. Economists have said the Middle East conflict could damage Britain’s economy more than other industrialised nations, given its reliance on global trade and its sensitivity to oil and gas price rises, research indicates.
Financial markets worldwide slumped on Friday, extending falls seen since the outbreak of the war, research shows. Borrowing costs also rose for the US and eurozone governments, according to research. The pound slumped to a three-month low against the dollar, dipping to just above $1.32, multiple reports indicate. UK borrowing costs have risen more than any other European nation, according to multiple reports. Britain is the only G7 country with a ten-year bond yield over 5%, multiple reports confirm. Public sector borrowing was £14.3bn in February, higher than expected and the largest February deficit on record outside the pandemic, according to the Office for National Statistics. The ONS said the economy had zero growth in January, contributing to market pressures, according to the Office for National Statistics.
Spending like drunken sailors.
City traders are betting the Bank of England could be forced to raise interest rates more aggressively than in the US or the eurozone to prevent stubbornly high rates of inflation from taking root, research indicates. Financial markets are pricing in at least two interest rate rises in 2026, according to research. Economists have warned that the Bank could be forced to take a tough approach to tackling inflation after losing some of its credibility by underestimating the leap in inflationary pressures in 2022, research shows. Some economists have questioned whether the Bank could have done much differently, arguing that a sharper rise in borrowing costs would have done little to restrain the energy price shock while tipping the UK into a deep recession, according to research. Experts have suggested that the central bank could “look through” the latest energy price surge, research indicates.
The increase in borrowing costs will add to the challenges facing Rachel Reeves, the chancellor, amid pressure on Labour to provide a package of financial support for households, research shows. Keir Starmer confirmed a £53m package to support some of Britain's poorest households with heating oil costs, and opened the door to wider intervention if high prices persist, according to Keir Starmer. An unfunded government intervention to subsidize household energy bills would trigger a gilt market rout likely to push UK long-term borrowing costs to the highest since 1997, according to bond investors and economists. Bond investors and economists warn that such intervention could be significantly negative for gilt yields and potentially spark a sell-off pushing 30-year yields near 6%, while economists note that increases in gilt yields could cut the Chancellor's headroom by £7.1bn in 2030/31 if sustained.
Maxed out the nation's credit card with record borrowing and runaway welfare spending.
Pension funds are being asked to put up more cash to cover hedging positions amid the bond sell-off, echoing the 2022 meltdown under Liz Truss, multiple reports indicate. Pensions consultancies XPS and Mercer reported some clients facing cash calls on LDI positions, but the market is operating normally, according to pensions consultancies XPS and Mercer. Bank of England plans to overhaul gilt repo market regulation could 'concentrate risks' and fail to improve financial stability, according to gilt traders and hedge funds polled by the Bank. The Bank's proposals include central clearinghouses for leveraged trades and minimum haircuts on collateral, which traders warn would hike costs and reduce demand for UK bonds, according to traders. Donald Trump’s extension of a deadline for a peace deal failed to soothe jittery investors, research shows. Market analysts have described investors as feeling more panicky this week, with Friday’s price action suggesting a loss of faith in Donald Trump’s ability to end the war and reach a deal with Iran.
According to Daily Mail - News, Mel Stride described spending like drunken sailors. According to Daily Mail - News, Kemi Badenoch described maxing out the nation's credit card with record borrowing and runaway welfare spending. According to Daily Mail - Money, Howard Davies described the increase in interest rates meaning about £12bn a year of additional interest payments, eating up a lot of the Chancellor's headroom.
The increase in interest rates means about £12bn a year of additional interest payments, eating up a lot of the Chancellor's headroom.
The UK government has not detailed specific measures to subsidize energy bills or how they will be funded. The exact impact of the Middle East conflict on UK inflation and how the Bank of England will respond in terms of interest rate decisions remains uncertain. Whether the current bond market sell-off will trigger a broader financial crisis similar to the 2022 gilt crisis under Liz Truss is unclear. How sustained the rise in UK borrowing costs will be and its long-term effect on public finances and economic growth has not been determined. The extent to which political rhetoric is influencing market perceptions versus fundamental economic factors is also unknown.