Rising gilt yields increase pressure on UK fiscal policy and markets
Government borrowing costs in the UK have climbed to levels not seen since the late 1990s, with the yield on 30-year gilts approaching a 27-year high.
On Monday, the interest rate on these long-term bonds rose by 0.05 percentage points to 5.61%, reflecting ongoing concerns about public finances and persistent inflation.
The increase brings the cost of 30-year government borrowing almost a full percentage point above the peak reached during the market turmoil of October 2022, when yields briefly spiked following policy announcements under then-prime minister Liz Truss. Monday’s yield matched levels last observed in April, a period marked by market volatility after tariff threats from the United States, and before that, not since May 1998.
Ten-year gilt yields also rose, up 0.05 percentage points to 4.74%. Analysts attribute the movement to continued uncertainty over inflation and expectations that the Bank of England will hold the base rate steady after its recent reduction to 4%. The market is now closely watching upcoming inflation data, with the consumer prices index forecast to rise from 3.6% in June to as much as 3.8% in July. Public finance figures due later in the week may further influence sentiment and could affect the government’s fiscal strategy.
The Bank of England just cut rates, but the UK's 30-year borrowing cost is UP. 🤯 The long-term gilt yield is at a 27-year high, showing a disconnect between short-term policy and market reality. 📉 #Gilt #BoE pic.twitter.com/p5FuAYND0V
— ICEBERG FINANCIAL (@iceberg_fin) August 17, 2025
Despite the higher yields, the impact on government finances has been somewhat mitigated by a shift towards issuing shorter-term debt. However, the UK’s fiscal position remains under scrutiny, with Chancellor Rachel Reeves facing pressure to maintain spending while adhering to Labour’s fiscal rules. The majority of government revenue is generated from income tax, national insurance, VAT, and corporation tax, limiting options for raising additional funds without resorting to tax increases.
The Bank of England is reportedly considering a slower pace of quantitative tightening in response to the higher yields. Meanwhile, the chancellor’s limited fiscal headroom has become a focal point ahead of the Autumn Budget, with some economists warning that rising borrowing costs could erode the government’s financial flexibility.
Reeves has emphasised her commitment to maintaining fiscal discipline. “One in £10 of government spending is spent servicing our debt,” she said during a recent Treasury Committee hearing.
“I am a Labour politician. I don’t think there’s anything progressive about spending £100 billion a year, often to US hedge funds when I would rather spend that money on our health service or on defence.”
Mortgage professionals are monitoring these developments closely, as changes in government borrowing costs and monetary policy can influence funding costs, swap rates, and ultimately mortgage pricing.
Want to be regularly updated with mortgage news and features? Get exclusive interviews, breaking news, and industry events in your inbox – subscribe to our FREE daily newsletter. You can also follow us on Facebook, X (formerly Twitter), and LinkedIn.
