Borrowing costs soar amid fears of another interest rate hike


Borrowing costs soar amid fears of another rate hike: Central banks set to step up fight against inflation despite risk of recession

Government borrowing costs have risen sharply around the world as investors bet on more aggressive interest rate hikes despite the risk of recession.

In another day of turmoil in financial markets that saw the pound hit a record high against the dollar, bond yields soared in the UK, US and across Europe.

Bond yields – the interest investors charge for loans to governments – have been rising for months as central banks raise rates in a bid to bring inflation under control.

On another day of financial market turmoil that saw the pound hit a record high against the dollar, bond yields soared in the UK, US and across Europe.

But there have been particularly big moves in Britain since Chancellor Kwasi Kwarteng last week announced £45billion in tax cuts as well as help for households and businesses with energy bills. .

As the pound fell below $1.04 before rebounding, the yield on British ten-year gilts rose above 4.2% to its highest level since 2010.

Yields on two- and five-year government bonds were the highest since 2008. Meanwhile, borrowing costs in Germany hit their highest since 2008 while in Italy, where a right-wing coalition is victorious in Sunday’s elections, they reached unprecedented levels. since 2013.

There have also been significant moves in the United States, with Treasury yields at a new 15-year high. Central banks around the world have raised interest rates as they battle soaring inflation. Further increases are expected in the US, UK and Eurozone in the coming months.

The Bank of England‘s Monetary Policy Committee (MPC) raised rates from 0.1% in December to 2.25% today.

UK rates are thought to hit 6% next year as the Bank is forced to take even tougher action following the fall of the pound and the Chancellor’s tax cuts.

The fall in the pound has even sparked speculation of an emergency interest rate hike ahead of its next meeting in early November – possibly this week.

But yesterday Bank Governor Andrew Bailey said he was ‘monitoring developments very closely in light of the significant revaluation of financial assets’.

He added: “The MPC will not hesitate to change interest rates as much as necessary to bring inflation back to the 2% target.”

The lack of immediate action caused the pound to fall again and sparked fresh criticism of the Bank for being too slow to tackle inflation.

Many observers expected rates to rise by 0.75 percentage points last week. But the Bank opted for a more modest increase of 0.5 percentage point.

Victoria Scholar, at Interactive Investor, said: “The statement, which was intended to stem further losses for the pound, actually did the exact opposite.”

“Forex traders sold the pound after the release in a sense of disappointment, no more aggressive action was taken. It appears that an emergency rate hike is not on the cards, at least for now.

Regarding last week’s 0.5 percentage point rate hike, she added: “It was probably a mistake.”

The Bank should have opted for the more hawkish approach to tackling inflation, with the economy poised to come under further upward pressure on prices after the fall of the pound sterling.

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