The British government bond yields have recently risen over higher inflationary pressure and stagnant economic growth expected after autumn fiscal budget was announced in October.
by Xinhua writer Zhang Yadong
LONDON, Jan. 9 (Xinhua) -- The British government bond yields have recently risen. The yield on 10-year UK government bonds climbed to 4.78 percent on Wednesday, the highest level since 2008, 1.002 percent higher than a year ago. Meanwhile, the 30-year government bond yield rose to 5.41 percent, the highest level since 1998, 1.021 percent higher than a year earlier.
At the same time, U.S. Treasury yields have been climbing as well. On Tuesday, the yield on the 10-year Treasury hit 4.695 percent, marking its highest level since April 2024. Some Wall Street analysts believe there is still room for it to rise, possibly nearing 5 percent.
Though partly influenced by U.S. tariff policy declarations, the rise in UK bond yields is primarily driven by domestic factors. Britain's autumn fiscal budget, announced last October, has already affected inflation trends and economic growth forecasts, contributing to the rise in bond yields.
Under the new budget plan, the British government will expand fiscal spending, putting more inflationary pressure on the economy. Since October, UK inflation has reversed its earlier downward trend and begun rising. The Office for National Statistics reported that the Consumer Price Index (CPI) increased to 2.3 percent in October and further to 2.6 percent in November. Market analysts expect this rise to continue, driven by increased government spending.
Britain's Office for Budget Responsibility (OBR) predicts that inflation in 2025 could be 1.1 percentage points higher than earlier forecasts and 0.6 percentage point higher in 2026. The Bank of England stated in its December monetary policy meeting that core goods and food price increases had already pushed CPI inflation from 1.7 percent in September to 2.6 percent in November, slightly exceeding prior expectations.
Rising inflation has made the Bank of England more cautious about cutting interest rates. Governor Andrew Bailey emphasized that monetary policy will need to stay restrictive for an extended period, hinting at a slow and gradual approach to any potential rate reductions. Due to ongoing economic uncertainty, Bailey avoided specifying when or by how much rates might be lowered in 2025.
The Bank of England has already held off on rate cuts since last December. Costas Milas, a finance professor at the University of Liverpool, said wage pressures are likely to keep Britain's inflation above 2 percent throughout 2025, leaving room for only two rate cuts at most during the year. As a result, the bank rate could stay above 4 percent by the end of this year, pushing bond yields even higher.
Britain's stagnant economic growth is another factor driving the rise in bond yields. The fiscal budget has dampened both business investment and consumer confidence. Sixty-three percent of over 4,800 businesses identified tax increases as a major concern, the highest level since 2017, in a survey by the British Chambers of Commerce (BCC). Business confidence has plummeted to levels last seen after the 2022 "mini-budget," with 55 percent of businesses planning to raise prices in the next three months to offset tax hikes. Only 20 percent of businesses increased investment in the past three months, while 24 percent reduced it.
BCC Director General Shevaun Haviland said that businesses of all sizes reported that the autumn fiscal budget negatively impacted investment. While the budget is strategically sound in the long term, it is causing short-term challenges for businesses. Compared to unexpectedly strong growth in early 2024, economic momentum had nearly vanished in the second half of last year. Data showed zero quarter-on-quarter growth in Q3, and the Bank of England expects the same for Q4. Research firms like EY have also lowered their growth forecasts for the British economy.
Under the new budget, the British government aims to increase tax revenues by 40 billion pounds (49.2 billion dollars) in the new fiscal year. However, this revenue growth is dependent upon robust business investment and economic growth. In light of the budget's impact, businesses are exercising greater caution in investment and hiring. As a result, the government may struggle to meet its tax revenue targets.
To follow through with their spending commitments, the government might need to increase bond issuance, pushing up yields across almost all maturities. Kallum Pickering, chief economist at Peel Hunt, warned that if bond yields rise further, the government may face a tough choice between raising taxes further or cutting spending.
The rise in UK bond yields has weighed on the pound against the U.S. dollar. On Wednesday, the exchange rate fell to 1.23 U.S. dollars per pound, the lowest level in nine months.■