Investors wary of the impact of the Iran conflict dumped UK government bonds on Friday, pushing the yield, or interest rate, on 10-year borrowing to its highest level since 2008.
The market move followed the Bank of England’s decision on Thursday to leave interest rates on hold and hint at a future increase. By Friday morning, markets were pricing in as many as three interest rate rises in 2026.
Higher gilt yields create a headache for the chancellor, Rachel Reeves, by pushing up the cost of servicing the government’s debt pile.
The 10-year yield was 4.933% by mid-morning – the highest level since the depths of the global financial crisis in mid-2008.
The latest public finances data, which was published on Friday morning, showed a higher-than-expected monthly deficit of £14.3bn last month – £2.2bn up on the same month a year earlier.
The Office for National Statistics said the data had been affected by the timing of government debt repayments, with some falling into February instead of January.
At the same time, the ONS revised up its estimate of January’s surplus – already a record for that month – to £31.9bn, from £30.4bn previously, helped by an increase in tax payments bolstering government receipts.
Reeves has deliberately increased borrowing for investment projects since Labour came to power in 2024 but has also raised taxes significantly, in an effort to reduce the current deficit, which measures borrowing to pay for day-to-day spending.
The latest data showed progress on that measure, with the current budget deficit in the 11 months to February down by 21.1% from the same period last year, at £62.1bn.
Total borrowing for the same period, of £125.9bn, looked on course to undershoot the Office for Budget Responsibility’s estimate for the year as a whole, of £138.3bn.
However, it came as analysts increasingly fretted that higher energy prices, inflation and interest rates as a result of the Middle East conflict could jeopardise the £23bn headroom the chancellor left against her fiscal rules in last autumn’s budget.
Martin Beck, the chief economist at the consultancy and analysis firm WPI Strategy, said: “That the deficit numbers are broadly on track will be a welcome development for a government keen to preserve fiscal credibility at a time of unwelcome geopolitical and economic turbulence. But that turbulence means the recent fiscal numbers may prove a poor guide to what comes next.”
Nabil Taleb, an economist at the consultancy PwC, said: “Interest rate cuts are inevitably deferred, inflation now looks set to pick up again, and growth remains subdued.
“That combination risks putting renewed pressure on borrowing and leaves the public finances exposed, underlining just how quickly the fiscal picture can shift.”
The government has repeatedly said its tax increases and measures to control inflation, including cutting energy bills from April, have put the economy in a stronger position to withstand whatever is to come.
The chief secretary to the Treasury, James Murray, said: “We have the right economic plan. Because of the choices we made before the conflict in the Middle East began, we are better prepared for a more volatile world.”
Labour had been hoping for more interest rate cuts from the Bank of England this year, to bolster consumer confidence and cut the cost of borrowing for businesses.
However, with oil prices up above $100 a barrel and the key choke point of the strait of Hormuz still effectively closed, the Bank’s nine-member monetary policy committee left rates on hold at 3.75% on Thursday and hinted they could even raise them amid fears of resurgent inflation.
