Chancellor Rachel Reeves is facing the prospect of more spending cuts as government borrowing costs rose to their highest since the 2008 banking crash.

Investors have been reacting to concerns over the threat of stagflation and a wider global sell-off in government bonds.

The interest rate, or yield, on 10-year gilts climbed 0.13 percentage points to 4.82%, meaning the Treasury has to pay more to investors.

Thirty-year gilt yields have surpassed even the tumultuous peaks witnessed during the short-lived Truss administration and rose to their highest level over a quarter of a century.

UK borrowing costs have risen much faster so far in 2025 than other big economies. Ms Reeves left herself a slender £9.9bn of headroom to meet her revised fiscal rules which is now under threat.

The chancellor pledged not to make any further tax changes until the autumn. As such, any corrective action is more likely to come in March in the form of spending curbs, according to officials.

Ben Nicholl, a senior fund manager at Royal London Asset Management, said: “The chancellor has no room left against her fiscal rules given the upward move in yields, and the market is questioning what the next move is from here.

“Raising taxes or cutting back on departmental spending will only put further downward pressure on growth, which in turn puts pressure on tax revenues when borrowing is already high.”

Anita Wright, chartered financial planner at Bolton James, commented: “The Bank of England clearly hasn’t got inflation under control, minimum wage and NI increases are being passed onto consumers in the form of higher prices.

“The bond market is saying, we’re pretty certain a second wave of inflation is coming back, similar to the 1970s. Markets now demand higher yields to compensate for inflation risk.”

Sterling was down 1.1% against the dollar by late afternoon to $1.234, its weakest level since April. In the stock market, the domestically focused FTSE 250 index fell 2% to a five-month low. the The FTSE 100 index edged up 0.07% to close at 8,251.03 points.

Company news

Energy giant Shell said it expects to take a $1.3 billion (£1bn) hit in the final quarter of its financial year from payments for emission certificates in Germany and US.

The company also said it expects profits in its gas business to be “significantly lower” in the fourth quarter than the previous three months, because of hedging contracts expiring. Shares in Shell closed 1.4% lower.

Getting up steam was model train maker Hornby whose shares climbed 12.2% after revealing its sales rose over the Christmas period.

The biggest fallers on the FTSE 100 were Barratt Redrow, down 21.3p to 398.7p, St James’s Place, down 42.5p to 820.5p, and Legal & General, down 8.8p to 221.4p.

InterContinental Hotels was 0.39% lower after Morgan Stanley downgraded its rating to ‘underweight’ from ‘equalweight’, adding to the day’s sector-specific losses.