Borrowing Costs Surge at Fastest Pace Since Iran War as UK Gilt Yields Hit 2008 Highs and Pound Faces Losses Against Euro and Dollar Amid Rate Hike Fears

UK government borrowing costs have surged to their highest level since 2008, driven by market turmoil linked to the escalating conflict in Iran and growing fears of an inflation shock.

The yield on 10-year UK government bonds, or gilts, rose to 5% at the close of trading on Friday, marking the fastest pace of increase since the start of the Iran war and the highest level seen since the depths of the global financial crisis.

This sharp rise in borrowing costs follows the Bank of England’s decision to hold interest rates steady at 3.75%, while signalling that further increases may be necessary in response to inflationary pressures.

Financial markets are now pricing in as many as three interest rate hikes over the course of 2026, reflecting concerns that the war in Iran could exacerbate supply chain disruptions and push energy prices higher.

The surge in gilt yields has intensified pressure on Chancellor Rachel Reeves, whose Labour government has increased borrowing to fund public investment since taking office in 2024, while also raising taxes to manage the public finances.

Higher borrowing costs directly increase the cost of servicing the UK’s national debt, creating a significant fiscal challenge for the Treasury as it seeks to balance investment priorities with long-term debt sustainability.

Stock markets on both sides of the Atlantic declined as investors reacted to reports that the United States is considering a military blockade or occupation of Iran’s Kharg Island, a move aimed at pressuring Tehran to reopen the Strait of Hormuz.

Analysts warn that such escalation could further disrupt global oil markets, amplify inflationary trends, and deepen uncertainty around the economic outlook for the UK and other major economies.

Nationwide has warned that the UK housing market is likely to soften amid the fallout from the Iran war, as higher borrowing costs and economic uncertainty weigh on consumer confidence and mortgage affordability.

The combination of rising debt servicing costs, stagnant growth, and external shocks has led to a wider reassessment of fiscal policy, with some commentators questioning whether current levels of borrowing can be sustained without triggering a loss of market confidence.