By Miriam Mukuru
Borrowing costs on U.K. 10-year government bonds surged to their highest in nearly 18 years after data showed U.K. public borrowing rose more than expected.
The figures coincided with worsening concerns about inflation as energy prices remained elevated due to the Middle East war. This has raised the prospect of the Bank of England having to raise interest rates despite a weak economy.
Yields on 10-year U.K. government bonds, or gilts, rose to 4.942%, their highest since July 2008, LSEG data showed.
"It's noteworthy that when we see a big selloff in developed-market fixed income, it's gilts that underperform because of the U.K.'s perilous fiscal starting point," Michael Brown, senior research strategist at Pepperstone, said.
U.K. public borrowing increased to 14.3 billion pounds ($19.20 billion) in February, from a 30.4 billion pounds surplus in January. This was higher than the consensus forecast of 9.3 billion pounds of borrowing by economists in a Wall Street Journal poll.
The data raised concerns about the sustainability of U.K. public finances in the face of domestic and international pressures.
The Middle East war threatens to weaken government finances further due to rising energy prices and the risk of high inflation.
The BOE on Thursday confirmed the inflation threat and signaled possible interest-rate rises if necessary.
U.K. money markets on Friday priced in three 25 basis-point interest-rate increases by the central bank this year, LSEG data showed. Prior to the start of U.S.-Israeli attacks on Iran, markets had priced in two rate cuts in 2026.
"Higher energy prices are forcing markets to abandon the rate-cut narrative and reprice a higher-for-longer path for the BOE," Lale Akoner, global market strategist at EToro, said.
There is a possibility the U.K. government will offer support to households to reduce energy inflation caused by high oil prices. However, such support is likely to put a strain on public finances, Capital Economics' deputy chief U.K. economist Ruth Gregory said in a note.
"The combination of some energy-price support and pressures from the weakening economy may soon put borrowing back on an upward trend," Gregory said.
Write to Miriam Mukuru at miriam.mukuru@wsj.com
(END) Dow Jones Newswires
March 20, 2026 08:19 ET (12:19 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
