Bank set to step up the fight against inflation

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Government borrowing costs jumped as traders bet on aggressively raising interest rates and increasing government spending.

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Yields on two-year securities — essentially the interest rate that investors demand to lend to the government — rose to 3.35%, not seen since 2008.

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These short-term bonds are more sensitive to an increase in the main interest rate of the Bank of England, and yesterday’s jump signaled that investors expect Threadneedle Street to experience a sharp rate hike this week.

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Borrowing costs: Short-term government bonds are more sensitive to an increase in the main interest rate of the Bank of England.

The bank has been raising rates since December in an attempt to tame red-hot inflation. Investors now expect a giant 0.75 percentage point gain to 2.5% tomorrow, the biggest move in 33 years.

In a sign that traders expect drastic action to continue, they are cutting interest rates to 3.75% by Christmas.

While such a move could help bring down inflation by encouraging saving rather than spending, it would increase the cost of debt for mortgage holders and other borrowers.

UK 10-year securities also hit their highest level since 2011, rising to 3.32% as Liz Truss made the case for tax cuts in her mini-budget on Friday.

With help on electricity bills also in the pipeline, government borrowing looks set to rise.

The more the government has to borrow through securities, the more investors will demand to earn a return.

Pressure on the bond market arises due to the fact that today the US Federal Reserve is to announce its decision on interest rates.

The Fed is aggressively fighting inflation and is expected to announce another 0.75 percentage point increase.

But it is forcing other countries to keep up with the times as investors flock to the dollar.

Credit: /

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