UK borrowing costs hit 28-year high as FTSE 100 drops 0.3%
Rising oil prices and eurozone inflation push gilt yields to levels last seen in 1998 ahead of Budget
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London’s stock markets fell on Tuesday as rising oil prices and inflation fears pushed UK borrowing costs to their highest level in 28 years. The FTSE 100 closed down 34.98 points, or 0.3%, at 10,789.28, as reported by the PA news agency. The yield on 10-year gilts reached 5.22%, a level last seen in 1996, while 30-year yields hit 5.85%, the highest since 1998.
The decline in equities followed reports of attacks on oil tankers in the Strait of Hormuz, a key shipping route. Brent crude rose to $92.48 a barrel, up from $88.06 on Friday. Susannah Streeter, chief investment strategist at Wealth Club, said the renewed conflict between the US and Iran had unsettled markets, raising concerns about energy costs and inflation.
FTSE 100 closes lower as inflation data weighs
London's main index recorded modest losses on Wednesday, with eyes on upcoming US tech earnings.
Inflation fears weigh on markets
Eurostat reported that annual consumer price inflation in the eurozone accelerated to 3.3% in August, up from 2.9% in July. This is the highest rate since September 2023, when inflation stood at 4.3%. The data comes ahead of the European Central Bank’s meeting next week, where a 25-basis-point interest rate rise is expected.
Kathleen Brooks, research director at XTB, said the rise in UK borrowing costs poses a “major challenge” for the Chancellor ahead of next month’s Budget. She estimated that every basis point increase in gilt yields adds to the UK’s debt servicing costs, which could rise by up to £6 billion by the end of this parliament.
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Every basis point increase in the cost of borrowing in the UK adds to debt servicing costs, which needs to be paid by the public purse. Since the spring, the UK’s interest-only bill has risen by up to £6 billion by the end of this parliament. This is a large hole for the Chancellor to fill next month.
Kathleen Brooks, research director at XTB
Winners and losers on the FTSE
Higher oil prices boosted shares in BP and Shell, which rose 5.2% and 2.6% respectively. Reckitt Benckiser climbed 4.4% after a US court ruled in its favour in a case involving its Mead Johnson baby formula division. The company said there are no outstanding jury verdicts in the necrotising enterocolitis litigation following the decision.
On the FTSE 250, Bodycote rose 4.6% after accepting a £1.65 billion takeover offer from Veritas Capital Fund Management. The Macclesfield-based firm said the deal values each share at 940p. Rival bidder CVC Advisers said it is “considering its position” but urged shareholders to take no action for now.
Capricorn Energy jumped 9.6% after recommending a higher cash offer from Norway’s DNO ASA, which trumped a bid from Genel Energy. The Edinburgh-based company said DNO will pay $4.224 per share, plus a special dividend of $0.99, for a total of $5.214 per share.
What happens next
The European Central Bank is expected to raise interest rates by 25 basis points at its meeting next week. In the UK, the Chancellor will present the Budget on 29 October, where higher borrowing costs are likely to feature in fiscal planning. Market analysts will continue to monitor oil prices and geopolitical tensions in the Strait of Hormuz.
Questions this report answers
+Why did the FTSE 100 fall on Tuesday?
The FTSE 100 dropped 0.3% due to rising oil prices and inflation fears, which pushed UK borrowing costs to a 28-year high. The yield on 10-year gilts reached 5.22%, increasing pressure on the Chancellor ahead of the Budget.
+How much could UK debt servicing costs rise?
XTB’s research director estimated that higher gilt yields could add up to £6 billion to the UK’s debt servicing bill by the end of this parliament. This increase poses a challenge for the Chancellor in next month’s Budget.
+What was the eurozone inflation rate in August?
Eurostat reported that annual consumer price inflation in the eurozone accelerated to 3.3% in August, the highest rate since September 2023. This data will influence the European Central Bank’s interest rate decision next week.
+Which companies saw the biggest gains on the FTSE 100?
BP and Shell rose 5.2% and 2.6% respectively due to higher oil prices. Reckitt Benckiser gained 4.4% after a US court ruled in its favour in a baby formula litigation case, removing a key legal risk.
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