2 September 2026: Long-term borrowing costs highest since 1998

Bank of England Monetary Policy Committee member Catherine Mann has said Britain's economy had shown signs of stronger growth since the Bank's last monetary policy meeting, when she voted with the minority to raise borrowing costs.

Mann told a Central Banking podcast that the labour market had stabilised and that inflation had been a little stronger than expected.

"The research is very detailed. Interest rates should be a little bit too high and then, of course, correct if necessary," she said in the interview released yesterday. "And that's the underpinning of the 25-basis-point hike I voted for at the last meeting."

Financial markets are fully pricing in a rate hike by the end of the year, but there is only about a 15% chance of a hike at the Monetary Policy Committee's meeting this month.

Long-term government borrowing costs have reached a 28-year high, putting further pressure on Prime Minister Andy Burnham and Chancellor John Healey ahead of Healey's first Budget, due next month.

The yield on the 30-year gilt rose to 5.89% on Tuesday, the highest since 1998.

Borrowing costs in the US, Japan and Europe have hit similar highs in recent days, reflecting investors' concerns about inflation, government borrowing levels and large tech companies' spending on AI.

Yesterday Andy Burnham told the House of Commons that his government's "bedrock", as it seeks to tackle the cost-of-living crisis, would be "fiscal responsibility".

All those factors will make the Budget process trickier for Burnham, who on Tuesday addressed MPs for the first time as Prime Minister, and his Chancellor, John Healey.

Burnham told the House of Commons that the economy and the cost of living were "the biggest issues facing the country".

Higher borrowing costs will reduce the government's headroom under its self-imposed fiscal rules, limiting how much Healey can spend on consumer-friendly measures to ease the cost of living.

Despite squeezed public finances, Burnham said he would bring about "more substantial change" to ease living costs.

"Britain is not where any of us would wish it to be," he added.

There is also concern about the government's commitment to spend 3% of GDP on defence by 2030, a landmark step towards NATO's commitment to reach 3.5% by 2035. Healey, who resigned as Defence Secretary over the issue in June, is thought to be reconsidering how he can meet this commitment in his Budget. However, Burnham implied it is still achievable.

As long-term interest rates rose to multi-decade highs, the number of mortgage approvals for home-buyers tumbled in July to its lowest level in more than two years, according to Bank of England figures.

Some 56,053 mortgages were approved for house purchase in July, marking the lowest monthly figure since January 2024, when there were 56,032 approvals, the Bank’s report said. In June, the figure was 58,215.

Over the past six months, monthly mortgage approvals for house purchases have averaged about 60,800, the Bank said.

Meanwhile, the Bank’s remortgaging approvals figures, which capture only remortgaging with a different lender, rose to about 34,500 in July, up from 34,100 in June.

Sterling softened modestly against the dollar but held steady and was slightly firmer against the euro yesterday. The move was driven mainly by global dollar dynamics and euro‑zone inflation data rather than UK‑specific news.

US factory activity continued to expand in August, with both the ISM and S&P Global manufacturing PMIs signalling further growth, even as demand, output and supply-chain conditions showed signs of cooling.

The Institute for Supply Management's manufacturing PMI eased to 54.6 in August, down from 55.6 in July, but still marking an eighth straight month of growth.

New orders, production and employment all remained in growth territory, though each slowed from July, with the new-orders index slipping three points to 53.7, while production edged down to 58.3 and employment to 51.2.

Backlogs also softened, falling to 51.8, while supply-chain pressures persisted as supplier deliveries rose to 59.3, indicating lengthening lead times for a ninth straight month. Inventories dipped slightly to 50.6, while customers' inventories remained firmly in "too low" territory at 42.8, a backdrop typically seen as supportive for future output.

Price pressures stayed elevated, with the prices index unchanged at 71.1, while export orders ticked up to 53.2 and imports eased to 52.5.

The ISM said sentiment among respondents skewed more negatively in August, with pricing volatility, the Iran conflict, longer lead times and tariff concerns frequently cited.

Fifteen industries reported growth during the month, led by primary metals, electrical equipment and miscellaneous manufacturing, while wood products and chemicals contracted.

On a separate note, S&P Global said its August manufacturing PMI held steady at 53.9, signalling another month of solid expansion even as demand and output growth softened amid persistent supply pressures.

Despite a softer demand backdrop, business confidence rose to a three-month high, underpinning the fastest job creation recorded so far in 2026. Improved optimism about the year-ahead outlook for PMI input prices and production also supported employment growth.

The Federal Reserve is now warning that it may need to raise interest rates if inflation does not cool soon. According to Fed Governor Michael Barr, he and the Fed would support a rate hike unless inflation shows convincing signs of easing soon. The Federal Reserve's current federal funds rate target range is 3.50% to 3.75%, while benchmark 30-year fixed mortgage rates average about 6.66% to 6.68%.

Speaking at a banking forum in Washington, Barr said he’s concerned about “broader price pressures taking hold” as inflation has remained above the Fed’s 2% target for more than 5 years. “If trends in the data give me some confidence that inflation is moderating on a path to 2%, then I think we can take a bit more time to assess our policy stance,” Barr said in prepared remarks. “However, if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates.”

Last week, Fed Chair Kevin Warsh told the Federal Reserve’s Jackson Hole symposium that policymakers would “have work to do” if they lacked confidence that inflation was returning to the central bank’s 2% target, his clearest signal yet that further rate hikes may be needed. Amid fresh worries over the US-Iran war, yields jumped again yesterday, with the benchmark 10-year note hitting its highest level since January 2025.

The U.S. dollar index strengthened slightly yesterday, edging up by about 0.1%, supported by firmer Fed rate expectations and rising inflation concerns driven by oil prices amid renewed tensions between the U.S. and Iran.

Bundesbank President Joachim Nagel has criticised the US for selling Euros in a recent attempt to support the Japanese yen without consulting European partners.

“Of course, it would have been desirable, and this has also been the customary practice in the past, to coordinate and consult in advance about such interventions,” Nagel said at a press conference in Asheville, North Carolina.

Japan intervened in the currency market at the end of July, and Treasury Secretary Scott Bessent confirmed in early August that the US had helped to counteract “disorderly” movements in the yen. Later reports revealed that it had used Euros rather than dollars, in an unprecedented breach of longstanding conventions.

“This issue was raised and openly discussed here,” Nagel said. “I think it struck a chord, in a positive sense, because people understood why we in Europe, in the Eurosystem, weren’t exactly thrilled that there had been no prior coordination here.”

The last time the US and Japan intervened in the yen was in 2011, when the Group of Seven helped weaken the overly strong Japanese currency.

“What matters now, looking ahead, is that if and when such measures should ever be taken again, I simply expect these issues to be coordinated beforehand,” Nagel said.

Geopolitical uncertainty is weighing on global growth, and G20 countries must work to reduce it, German ‌Finance Minister Lars Klingbeil has said.

"Uncertainty is poison for ‌economic growth," he said on the sidelines of the meeting of G20 finance ministers and Central Bank Governors.

The war in Iran, ongoing U.S. tariff disputes and China's distortion of competition have all led to instability, Klingbeil added.

"The tariff conflicts being pursued by the U.S., such as the current ‌dispute with Canada, destroy ⁠trust," he said, adding that such spats ultimately hurt all parties and reduce prosperity worldwide.

Klingbeil said Germany supported a rules-based ⁠international order, international law and multilateralism.

"Germany stands for a world in which the rule of law prevails, rather than the law of the strong," he said, adding ​that ​Europe should respond more forcefully when trading ​partners fail to follow agreed ‌rules.

Eurozone inflation rose sharply in August as energy prices climbed more than 14% YoY.

Eurozone inflation reached 3.3% in August 2026, up from 2.9% in July, according to a flash estimate from Eurostat, the statistical office of the European Union.

The increase was largely driven by energy, as global oil and gas prices surged amid the war in Iran and disruption to shipping through the Strait of Hormuz. Energy prices rose by 14.3% in the year to August, accelerating from 10.3% in July.

This was driven by a rebound in fuel prices following the renewed closure of the Strait of Hormuz, while underlying price pressures remained contained as services inflation came down. Inflation should remain well above target into next year, as higher gas and food prices put additional upward pressure on the index.

Food, alcohol and tobacco prices rose by 1.2%, unchanged from July.

Services inflation, a more persistent measure closely watched by the ECB, eased from 3.3% to 3.0%.

MoM, overall prices in the eurozone rose 0.4% in August, with energy prices alone up 2.9%.

At the same time, core inflation, which excludes energy, food, alcohol and tobacco, edged down from 2.5% to 2.4%. This suggests that the rise in energy costs has not yet spread extensively to services and other prices.

The Euro weakened modestly across major FX pairs yesterday, slipping against the dollar and the pound while showing mixed performance elsewhere.

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