Bank of England governor urges chancellor to restore market confidence

Andrew Bailey, the governor of the Bank of England, has called on Chancellor John Healey to deliver a budget that reassures financial markets. This appeal comes after United Kingdom medium-term borrowing costs reached a fresh 19-year high, prompting significant volatility in government bond markets. Bailey emphasised that fiscal policy must be viewed as credible by investors to prevent further turmoil that could increase the cost of servicing national debt.

The pressure on the government has intensified as investors have moved away from UK gilts, which were previously regarded as safe havens. This shift is driven by growing concerns over rising inflation and the sustainability of public finances. The yield on 10-year UK government bonds climbed to 5.515 per cent by midday in London, marking the highest level since July 2007. Yields on 20-year and 30-year gilts also rose to their highest levels since 1998. Although yields retreated somewhat during a day of volatile trading, analysts warned that further instability in the Middle East could push borrowing costs higher as fears of entrenched inflation persist across major economies.

Speaking at a conference in Istanbul, Bailey stated that while he would not intervene in government policy, he had a specific message for the chancellor. He argued that realistic commitments to controlling debt are essential to curb investor demands for higher returns, particularly during periods of negative shocks such as geopolitical conflict. He noted that such credibility is required more than ever when external pressures threaten market stability. The recent bond rout has dramatically increased borrowing costs for the UK, adding to the challenges facing the government ahead of its upcoming tax and spending announcement scheduled for 28 October.

Economists suggest that rising borrowing costs and a weaker growth outlook have likely eroded a significant portion of the fiscal buffer built up by the previous administration. The cushion, which was approximately 24 billion pounds at the time of the spring statement in March, may have been halved or reduced by an even greater margin. Healey is expected to raise taxes at the budget to partially rebuild this headroom while funding policy measures, including a temporary reduction in value added tax on electricity bills and support packages for low-income households. However, some economists caution against excessive tax increases, arguing that maintaining the surplus at previous levels could unnecessarily damage economic incentives.

The broader global context has seen a widespread selloff in government bonds across major economies, exacerbated by soaring oil prices and unresolved tensions in the Middle East. France has been particularly affected, with its 10-year bond yield jumping nearly 80 basis points since the start of September to its highest level since 2002. European Central Bank officials and eurozone finance ministers are reportedly preparing to urge the French government to pass a 2027 budget to calm markets, although no public plea is expected. Meanwhile, Kristalina Georgieva, managing director of the International Monetary Fund, has urged governments worldwide to act decisively to tighten fiscal policy in response to rising yields, warning against delaying necessary policy actions.

The impact of higher yields extends beyond government borrowing, affecting homeowners and businesses across the economy. In the United States, Treasury Secretary Scott Bessent has attempted to lower yields on long-term debt by increasing buybacks of government bonds. However, this strategy appears to have had limited success, with yields on 30-year treasuries rising above 5.7 per cent since the policy was announced in August, despite being around 5.235 per cent at the time of the initial announcement. The global rise in borrowing costs underscores the urgent need for credible fiscal management to maintain financial stability.