UK borrowing costs up as 2015 rate rise looms

 
Tim Wallace
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BRITISH government borrowing costs hit their highest level since 2011 yesterday as markets began doubting whether interest rates can stay at rock bottom for as long as the Bank of England believes.

Bank governor Mark Carney indicated he will only consider raising rates from their current 0.5 per cent when unemployment falls below seven per cent, which he expects to happen in 2016.

But strong economic data means markets expect a rate rise in 2015.

The interest rate on 10-year government bonds increased from 2.47 per cent to 2.6 per cent, in the course of the day hitting the highest level since October 2011.

“Financial market pricing suggests the first rate hike will occur in the second half of 2015,” said Barclays analyst Simon Hayes.

“This could reflect either an expectation that unemployment will fall more quickly than we and the Bank of England’s monetary policy committee forecast, or that investors believe the committee will renege on its guidance for some other reason.”

One alternative may be that investors believe inflation will stay higher than the governor currently estimates, triggering a raising of interest rates.