United Kingdom Suffers Cost of Borrowing and Energy Shocks
The cost of borrowing for the UK government has soared to its highest level in eighteen years (when the global financial crisis 2007 – 2009 gripped the world) due to the economic shocks emanating from the US/Iran/Israel conflict. The Strait of Hormuz remains closed and 1/5 of the world’s crude oil remains in the ground, building fears of inflation shocks to many countries. In the United Kingdom, as of close of business on Friday 20th March, 10-year Gilts yields (a benchmark for government long-term borrowing costs) rose by 0.76%, capping a 5.00% rise since the start of the war in the Middle East.
A Comparison with Global Markets
Experts suggest that the sell-off in UK government bonds is even more brutal than in 2022 when the previous Prime Minister Liz Truss introduced her mini-budget, which resulted in the UK government bond market taking a heavy beating. Analysts point to the fact the jump in the UK’s borrowing costs has not been matched in other economies, for example the corresponding rate on the 10-year German government Bund is only up 0.38% and in the United States the US treasury benchmark borrowing costs are up 0.41%.
The UK’s Energy Vulnerability
Analysts point to why the UK government bond market is having a much worse time than many of their counterparts, which is due to the economy being more vulnerable to oil and gas price rises than many of their peers. In 2024, data shows that 35% of the UK’s total energy consumption was made up of natural gas (Europe’s reliance on gas is now only circa 1/5th of total energy consumption), which heats the vast majority of homes in the United Kingdom. This sadly reflects on the government once again not learning from the energy shock created by the invasion of Ukraine by Russia on 24th February 2022. The UK is therefore much more vulnerable to imported inflation (America being fairly secure as a net exporter of LNG). Data released shows that UK 1-year inflation expectations have risen 1.8% since the US/Iran/Israel conflict began, a much bigger increase than their peers in the USA and the Eurozone.
Inflation and the Interest Rate Outlook
UK government bonds are highly sensitive to rising inflation; notably, 2-year gilt yields, which track Bank of England interest rate expectations, recently climbed to an over a year high of 5.35%. Brent Crude is currently trading at $106.77pbl with market expectations of the price going higher the longer the Strait of Hormuz remains closed, and money markets are now anticipating a rise in interest rates of 75 basis points this year. The energy shock is exacerbating the outlook on inflation and as the cost of borrowing rises, so will the effect on businesses and consumers in the United Kingdom. Already, costs of both diesel and petrol at the pumps have gone up, as have certain foods in the supermarkets.
The Impact on Households and Industry
Householders in the UK are already seeing mortgage deals pulled from the market, and as of July, this year consumers have been warned to expect a whopping 20% increase in energy bills. This increase could prove devastating for many households who are already struggling to pay their energy bills at today’s prices, especially alongside fuel and food price increases, making a very hard second half of 2026 for consumers. Elsewhere, in the airline industry, experts suggest that around the top 20 quoted airlines have lost a combined total of $54 billion in market value. The price of an airline ticket is also about to go through the roof due to jet fuel more than doubling in price since the Middle East conflict began. Despite the tendency for official narratives to focus on external pressures, consumers continue to face the direct consequences of these price spikes as historical economic patterns repeat themselves.
