UK government borrowing costs jumped for a second consecutive day on Tuesday as escalating conflict in the Middle East stoked fears of stalling economic growth and rising inflation. Investors grew anxious that higher oil and gas prices would delay expected interest rate cuts by central banks.
Brent crude climbed above $83 a barrel, up from around $60 in December, adding pressure on businesses and households already recovering from a prolonged period of high inflation. Market bets that the Bank of England would cut rates at its next meeting on 19 March tumbled from 80% to just 30%.
Yields on two-year gilts, effectively the interest rate on UK debt, jumped as much as 16 basis points to 3.8% before easing to around 10 points higher. The rise came despite better-than-expected borrowing figures announced by Chancellor Rachel Reeves in her spring forecast speech, which failed to generate a positive response amid the geopolitical crisis.
David Aikman, director of the National Institute of Economic and Social Research, said: “The UK’s improved borrowing position announced in today’s spring statement has been overshadowed by the Middle East crisis. If the crisis persists, higher energy prices will feed through to inflation, increasing borrowing costs further, putting serious pressure on the budget outlook.”
Kathleen Brooks of currency trader XTB noted that bond markets were pricing in “the worst-case scenario of a prolonged war in the Middle East and an energy-price inflation shock.” The Office for Budget Responsibility’s spring forecast had assumed lower borrowing costs, but recent bond yield increases reversed those gains.
Britain plans to issue £252.1bn of government bonds in the 2026-27 financial year, according to the UK Debt Management Office, compared with £303.7bn in 2025-26.
