Despite five rate cuts in the past year, long-term borrowing costs continue to climb in the United Kingdom (UK).

The yield on the country’s 30-year government bond has surged above 5.70%, its highest level since April 1998, while the pound fell as much as 1.3% against the dollar and 0.7% against the euro, underperforming all other major currencies. 

With the FTSE 100 now also dropping 0.6%, investors are growing more uneasy over the UK’s fiscal outlook.

The UK faces fiscal challenges

The market moves come ahead of Chancellor Rachel Reeves’s £35 billion (around $46.79 billion) autumn budget shortfall, with tax increases widely expected as she seeks to fill a fiscal gap. 

Prime Minister Keir Starmer also introduced some changes to his Downing Street team on Monday, September 1, bringing in deputy Darren Jones and naming former Bank of England deputy governor Minouche Shafik as chief economic adviser.

Starmer’s plan suggests a plan to reinforce his economic policy credentials heading toward what is shaping up to be a challenging last quarter.

What’s more, the crisis coincides with a syndicated sale of 10-year gilts, further testing investor appetite for government debt.

Naturally, the turmoil was felt on the continent as well. For instance, French 30-year yields jumped to their highest level in over 16 years, while Japanese bonds also slid on debt concerns.

Santander now expects the Bank of England to hold interest rates at 4% until the end of 2026 instead of falling to 3.5% by April next year as previously forecasted, according to Victoria Clarke, the bank’s chief UK economist.

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