U.K. borrowing costs surged to their highest levels since Labour took office following Chancellor Rachel Reeves' budget announcement, which included £40 billion in tax hikes aimed at addressing public finance deficits and increasing investment in public services. The yield on 10-year government bonds rose by 7 basis points, reflecting greater perceived risk among investors, while the Treasury plans to raise gilt issuance by £22.2 billion to meet financing needs. Despite the increase in borrowing, analysts suggest that the market remains relatively stable compared to previous volatility, with inflation significantly lower than during the Truss administration.
The Labour government, facing a £22 billion financing shortfall, is preparing a challenging October budget aimed at revitalizing the sluggish economy without returning to austerity. Economists anticipate a faster pace of interest rate cuts as inflation eases, with expectations for the Bank of England to lower rates to 4.5% by year-end and potentially to 3% by September 2025, contingent on the budget's impact.
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