9 October 2026: Government borrowing rates hit another 28-year high

British employers are on course to raise pay by around 3.5% next year, a bigger increase than would help return inflation to its 2% target, Bank of England policymaker Megan Greene has said. “Early indications are that pay settlements should grow by around 3.5%. So there’s not a whole lot of wage disinflation happening there, and that worries me,” she said at a conference in Cape Town. Greene voted in June, July and September for the BoE to raise interest rates by a quarter-point to 4%. Financial markets expect a majority of the BoE’s Monetary Policy Committee to back a rate rise to 4% at their next meeting early next month.

Greene went on to tell her audience that the Bank of England should not keep relying on high bond yields to tame inflation. "It's quite dangerous just to assume the markets will do your work for you. At some point, you need to put your money where your mouth is."

Bank of England Governor Andrew Bailey has argued that a sharp rise in market borrowing costs and mortgage rates following the start of the U.S.-Iran war has given the BoE time to assess whether it needs to raise its own interest rates in response to higher energy prices.

Meanwhile, Bailey told reporters in Istanbul, where he was preparing for a conference of central bank leaders, that low economic growth and a succession of supply shocks can erode public finances and leave governments with less cushion to support people through a downturn. Bailey said Russia’s war in Ukraine and the conflict in the Middle East are examples of large negative supply shocks.

His warnings about fiscal policy come weeks before the Chancellor is set to lay out his plans for taxation and spending in the autumn Budget statement. “Lower growth and repeated supply shocks weaken the public finances while increasing pressure on governments to provide support.”

30-year bond yields rose to a 28-year high on Wednesday as a global bond selloff pushed equivalent US borrowing costs to their highest since 2002, adding pressure on finance minister John Healey ahead of his first budget in three weeks.

Yields on 30-year gilts, once a major part of UK debt issuance, jumped 13 basis points to 6.036% in the early afternoon, as New York trading reached its highest since January 1998 and pushed past a previous record set on October 1.

Yields on 20-year gilts were a whisker away from a similar record, and 30-year yields were on course for their biggest daily rise since August 14.

Inflation and high levels of government borrowing remain major concerns for bond investors globally, and on Wednesday they were exacerbated as oil prices, inflamed by the US-Israeli war against Iran, rose further above $100 a barrel.

Wednesday's move in gilts followed John Healey's meeting with economists employed by primary dealers, also known as gilt-edged market makers or GEMMs, to gauge market sentiment ahead of his first budget on October 28.

"He emphasised the importance of fiscal credibility in a challenging global economic environment, reaffirming the government's commitment to the fiscal rules and its focus on delivering economic stability, growth and jobs," Britain's finance ministry said in a statement on Wednesday.

The assembled economists don’t doubt Healey’s sincerity in his desire for fiscal discipline; they simply feel that economic conditions are conspiring against him.

Economists at Bank of America earlier forecast that Healey's budget would lead to £15 billion ($19.9 billion) increases in public borrowing in both the current financial year and 2027/28, and to less leeway to hit longer-term budget goals

The pound edged higher against the dollar, but global FX pairs showed only modest, mixed movement yesterday, with gains driven largely by short covering and a softer USD rather than any shift in UK fundamentals. Sterling briefly pushed above $1.3280 before settling near $1.3249, up around 0.2% on the session, helped by a weaker dollar and a dip in Brent crude below $100. Gains were fragile and mostly driven by positioning rather than any great conviction.

In a fast-moving economy, and despite weaker-than-expected September jobless figures, the latest FOMC minutes appear a little out of date.

Federal Reserve policymakers were divided last month over the rationale for raising interest rates, with "some participants" seeing a hike as necessary to keep the impact of energy and other price shocks at bay. At the same time, a more hawkish core has recently emerged, arguing that further hikes are necessary to guard against emerging demand-driven inflation.

Although he competing arguments were outlined in the minutes of the US Central Bank's September 15-16 meeting, at which the Fed voted unanimously to raise the policy rate by a quarter of a percentage point, officials disagreed about whether the move was largely precautionary or marked a shift towards significantly tighter monetary policy meant to curb investment and spending.

The split, and differing views on where the economy stands, set up a likely vigorous debate at the October 27-28 FOMC meeting over whether inflation has taken on a broader, demand-driven dimension that warrants further Fed action now. One alternative is to delay further rate hikes to see whether incoming data show energy, tariff, and other price shocks receding and inflation heading back to the Federal Reserve's 2% target.

"Many participants have since emphasised that a higher path for the target range would be prudent on risk-management grounds, providing insurance against inflation remaining persistently above target due to stronger-than-expected demand or further adverse supply shocks," the minutes of the session, released on Wednesday, said.

Since the September meeting, Fed officials, with and without voting privileges, have become more hawkish.

Arguments outlined at the September meeting have persisted, with some policymakers also saying they feel more and faster rate hikes are needed, potentially ​setting up a divided outcome and multiple dissents at the meeting later this month.

The public’s near-term inflation expectations jumped in September to their highest level in over three years as households downgraded both their current and future financial outlooks, the Federal Reserve Bank of New York said on Wednesday.

Respondents to the bank’s latest Survey of Consumer Expectations said they project inflation to hit 3.9% a year from now, the highest level since May 2023, up from August’s forecast of 3.6%. Inflation three years from now is 3.3% versus 3.2% in August, while expected inflation five years from now holds steady at 3%.

The inflation outlook deteriorated as households forecast future increases across all the categories the bank tracks: gas, food, rent, medical care and college costs.

The New York Fed report tracking the public’s souring mood aligns with other recent reports showing downbeat consumers in an economy that continues to suffer from high, persistent inflation.

The report lands as pivotal midterm elections loom, with polls suggesting President Donald Trump and Republicans face a rough ride amid an ongoing affordability crisis in the US economy, largely tied to their policy actions.

Many Fed officials say the main drivers of current outsized inflation gains are the ongoing impact of the president’s trade tariffs, energy price surges from the war in the Middle East, and pressure from the frenzied pace of tech investment.

The sell-off in US government bonds has continued after Federal Reserve Governor Christopher Waller signalled that further interest-rate hikes may now be needed to bring inflation back under control. However, he left the timing of those moves uncertain.

The 10-year Treasury yield climbed six basis points to 5.34%, nearing its highest level since 2002. Meanwhile, the 30-year Treasury yield rose five basis points to 5.71%, remaining near a 24-year high, while the two-year yield gained five basis points to 4.81%.

Higher oil prices fuelled inflation concerns, with Brent crude futures hovering around $105 a barrel.

The US dollar weakened slightly on global FX markets yesterday, with the dollar index slipping about 0.08% as lower US Treasury yields and a well‑received long‑bond auction reduced demand for the dollar. The dollar lost a little ground across major pairs, reflecting easing yields, Fed expectations, and lower oil prices. This was a mild, broad‑based softening rather than a sharp move.

Nominations to succeed European Central Bank official Isabel Schnabel must be submitted by month's end, as President Christine Lagarde’s future there remains unclear.

Eurozone Finance Ministers meeting in Luxembourg agreed to set the nomination deadline for Oct. 28, Eurogroup President Kyriakos Pierrakakis said at yesterday’s meeting, adding that “hopefully the selection will happen at our November meeting.”

“We’re opening up a selection process for a single position with a specific time frame,” Pierrakakis said.

His boss, Greek Prime Minister Kyriakos Mitsotakis, recently predicted a prospective “grand bargain” on that job, along with two other impending ECB positions. Schnabel’s January exit coincides with speculation about Lagarde's early departure and the end of Chief Economist Philip Lane’s term in May.

The ECB President has hinted at leaving early, most recently in an interview with a French newspaper last week, where she said she might quit “a few months” before her term ends next October.

Pierrakakis also said Europe must channel more of its private savings into investment and remove barriers that keep bank finance divided along national lines. Europe remains “one of the richest and most successful economic areas in the world” but “is not growing fast enough”, he told a forum hosted by the European Banking Federation and Business Europe.

Stronger growth translates into “better jobs, higher wages and rising living standards”, he said.

Pierrakakis commented that Europe needs to invest more in defence, energy security, artificial intelligence and strategic infrastructure, adding that “economic strength is increasingly aligned to geopolitical strength”.

He cited an estimate by former European Central Bank President Mario Draghi that Europe needs around €800 billion in additional investment each year.

Public finances and EU resources matter, he said, but “budgets cannot finance Europe’s transformation alone”.

Europe “does not lack money” because it has large private savings, but has not yet built a financial system capable of putting enough of those savings to work in the European economy, he noted.

Eurozone inflation is high, with upward risks dominating, but expensive energy has yet to feed through to wages and other prices, Bundesbank President Joachim Nagel has said.

Inflation in the bloc is now running at 3.8%, nearly double the ECB’s 2% target. It could still rise, fuelling worries that soaring energy prices will eventually trigger hard-to-break second-round effects and perpetuate rapid price growth without aggressive central bank action.

“There are so far no clear signs that inflation has fed through to price and wage setting,” Nagel said in a speech in Sorrento. “Longer-term market-based and economist expectations remain consistent with the Eurozone’s 2% inflation target.”

Still, Nagel did not sound all-clear and warned that price pressures are expected to stay strong, even excluding volatile food and energy prices.

“Gas prices are especially vulnerable because storage levels are low, and Europe may need to buy substantially higher volumes during the winter,” Nagel told a precious metals conference.

“The destruction of refining capacity is driving up prices for refined petroleum products, particularly diesel, significantly. Drought, wildfires and fertilizer shortages also pose risks to food prices,” Nagel added.

This long list of risks is why financial markets expect the ECB to raise its 2.5% deposit rate two or three more times over the next six months, on top of two hikes this past summer.

Nagel, however, did not endorse market bets and said the ECB needed to stay flexible and base decisions on incoming data.

Markets are pricing in a 20% chance of an ECB interest-rate hike in October and an 80% chance of an increase in December, according to available data.

Speaking about rising yields, Nagel said this was making bonds more attractive to reserve asset managers.

However, he added that the case for diversifying into gold remains significant given continued geopolitical stress and the credit risk associated with high debt levels.

The euro slipped slightly on global FX markets yesterday, losing a touch of ground against the US dollar and showing broadly flat‑to‑soft performance across most major pairs. The move was small, driven mainly by mild USD strength and a lack of fresh euro‑area data. The single currency fell about 0.08% vs the USD, with EUR/USD moving from 1.1197 to 1.1211 on the day’s close.

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