Bank of England pushed by markets to raise rates as bonds hit 16-year high

Government debt worth £4 billion was sold, with the highest yield of any gilt since 2007

Commuters make their way across London Bridge. Britain’s borrowing bill rose by more than expected in May. Getty

Borrowing costs in Britain have rocketed to a 16-year high as traders pile pressure on the Bank of England for more base rate increases to get a grip on inflation.

Fears that savers are missing out on the escalating return on money in the UK prompted regulators from the Financial Conduct Authority to call in bank bosses on Thursday to urge institutions to pay more interest on accounts.

The government’s growing bill for financing was shown in the markets on Wednesday gilts worth £4 billion ($5.08 billion) were sold on Wednesday, with a high yield that underlined the level of return the government must offer buyers to persuade them to purchase UK debt.

The UK Debt Management Office got away the two-year bond at auction that will give investors an annual return of 5.668 per cent.

The average two-year fixed residential mortgage rate has risen to 6.52 per cent on Thursday. A one-year fixed deposit at a bank averaged 4.83 per cent.

Britain has a higher proportion of index-linked debt than any of its partners in the Group of Seven, the National Audit Office (NAO) has said, warning that the floating instruments represent 25 per cent of government gilts.

Payments to lenders increase with inflation owing to demand for index-linked debt from defined-benefit pension schemes.

“As debt-servicing costs rise, choices about spending in different government areas become more acute, particularly at a time when higher inflation places greater pressure on existing budgets,” the office said.

Britain’s borrowing bill rose by more than expected in May.

According to figures released by the Office for National Statistics, £20 billion was added to the bill, larger than the £18.3 billion expected by the Office for Budget Responsibility and beating economists’ estimates of £19.5 billion.

This contributed to pushing the country’s debt ratio further above 100 per cent of GDP for the first time in more than 60 years.

Spending on the National Health Service, energy subsidies for households amid a cost-of-living crisis and an increase in benefits to account for inflation all contributed to the rise.

The Bank of England has aggressively increased interest rates in the UK for more than a year.

In June the Bank raised the basic rate by 0.5 percentage points to 5 per cent. It marked a further blow for homeowners and came a day after figures showed inflation remained at 8.7 per cent in May.

Investors are braced for possible further rises, with some analysts predicting interest rates could balloon to 6.5 per cent.

Prime Minister Rishi Sunak has made a pledge to halve inflation in 2023, one of the five key pillars of his government.

He insisted his government will “hold our nerve” to tackle inflation and backed continued interest rate increases, despite their effect on homeowners.

Mr Sunak said “inflation is the enemy” and supported the Bank's decision to raise interest rates to a 15-year high.

After coming into office following a tumultuous period for financial markets due to his predecessor Liz Truss’s mini budget, Mr Sunak sought to portray himself as a safe pair of hands at the helm of the Conservative Party.

The former chancellor, who worked for Goldman Sachs in hedge funds before entering politics, has also vowed to reduce national debt.