Nervous investors in big economies have been dumping government bonds, raising the cost of borrowing, as rising oil prices amplified fears about rising inflation. The cost of a barrel of oil jumped 6% to above $107 on Thursday amid concerns that advances by Houthi rebels along Yemen’s Red Sea coast could choke off Saudi crude exports. Higher oil prices, which had already risen since hostilities in the Iran war resumed, are expected to increase inflation, leading central banks to raise interest rates and slowing economic growth. A line graph showing 10-year government bond yields for the United Kingdom, the United States, Japan and Germany since 2000 Donald Trump suggested on Wednesday that the conflict with Iran could continue until “immediately after” the November US midterm elections, at which point he claimed oil prices would be “tumbling lower.” The European Central Bank (ECB) raised its main interest rate to 2.5% on Thursday, with its president, Christine Lagarde, saying: “We believe that inflation will be longer-lasting than we had anticipated.” above the central bank’s target for longer than expected. Photograph: Filip Singer/EPAA As Thursday’s sell-off accelerated in London, the yield, or interest rate, on the UK’s 10-year government bonds rose above 5.37% – the highest borrowing cost since 2007 – creating a new headache for the new chancellor, John Healey. and devour the Treasury’s fiscal margin. A line graph showing crude oil prices per barrel since the start of the war with Iran. At the same time, the prospect of higher energy bills as oil and gas prices rise is likely to intensify pressure on the government to help consumers weather the winter. Unleaded petrol prices have already risen by 6p a liter since the beginning of September, according to motoring organization RAC, while the prospect of higher inflation has led some banks to increase their mortgage rates. Healey has promised to provide a “breather” for UK households while also tackling the cost of doing business. UK unleaded petrol prices have already increased by 6p a liter since the beginning of September, according to the RAC. Photograph: Murdo MacLeod/The Guardian In a speech on Monday, however, he also sought to calm bond market fears by pledging to “control borrowing to curb inflation and reduce long-term pressures on our public finances”. Every weekdaySign up for Business TodayGet ready for the workday – we’ll give you all the business news and analysis you need every morning after the newsletter promotion. In the US, where Trump has promised to issue a $5,000 (£3,700) check to every adult citizen if the Republicans win the mid-term elections, Thursday’s sell-off lifted the yield on 10-year loans to 4.92%, the highest since 2023. Borrowing also continued to rise, with 30-year yields hitting the highest level since 2007, despite US Treasury Secretary, Scott Bessent intervened directly in the debt markets on Wednesday. Bessent hoped to reduce yields by buying back $6 billion in government debt; but investors appeared to respond by deepening the sell-off. Kyle Rodda, senior financial markets analyst at brokerage Capital.com, said: “Ultimately, a sustained decline in long-term yields can only be achieved through genuine changes in macroeconomic policy: either the US government cutting spending or the Federal Reserve raising rates.” Bessent at the Republican convention in Dallas, where Donald Trump promised $5,000 to every adult American citizen if the party wins the midterm elections. Photograph: Kent Nishimura/AFP/Getty Images Markets expect an increase, which could anger Trump, who has repeatedly demanded rate cuts. In a TruthSocial post last week, the president said, “The Federal Reserve Board, with its great new leader, needs to get smart: BE PATRIOTS for a change.” A raft of UK data due out over the next week, including inflation, employment and growth, will provide an up-to-date snapshot of how resilient the UK economy has been in the face of the Iran war. In the first six months of the year, UK growth was the strongest among the G7 economies. This was despite higher than expected oil prices and the absence of expected rate cuts. Bank of England policymakers will also meet next week, but are expected to leave the UK’s key interest rate at 3.75% for the time being as they continue to monitor the impact of higher oil prices.
