Will the recent sell-off of UK government bonds affect bank interest rates?

Since the Labour government released its first budget in October last year, the pound has fallen nearly 6% against the dollar, and UK government bond yields have risen across the board; the 10-year gilt yield has reached its highest since 2008, while the 30-year gilt yield has surpassed its highest level since 1998. This differs from the bond yield spike in 2022 when then-Prime Minister Liz Truss announced a mini-budget with significant tax cuts to stimulate the economy, leading to market concerns about substantial government borrowing and resulting in a sell-off of UK bonds, which caused bond yields to surge. The liquidity issues following the bond sell-off forced the Bank of England to temporarily resume its bond-buying programme.

The current rise in UK bond yields is due to deteriorating public finances. The Office for Budget Responsibility (OBR) has indicated that the government's fiscal deficit for the fiscal year 2025-2026 will reach £26.2 billion. To manage this deficit, the Labour government proposed a tax hike plan of £40 billion. Despite promises to restart economic growth while ensuring that debt as a proportion of the economy decreases over five years, investor confidence in achieving these fiscal targets has weakened. The government's plan to control spending and increase taxes is seen as detrimental to economic growth. Additionally, since the budget was announced, the rise in bond yields has increased the cost of government borrowing, adding further pressure on public finances.

However, unlike the bond sell-off in 2022, the Bank of England has raised interest rates eight times since 2021, reaching the highest level in 14 years to combat inflation, with UK bond yields moving in tandem with UK bank rates. Currently, the UK has embarked on a rate-cutting cycle since August 2024, with two rate cuts so far; Bank of England Governor Andrew Bailey has reiterated that there might be gradual rate cuts next year, describing the process of inflation decline as deeply rooted. Therefore, despite the surge in bond yields, it has not significantly impacted UK bank rates, with bank rates moving in the opposite direction to bond yields.

Following the Bank of England's rate cuts, banks have generally followed suit, and deposit rates at major Main Street banks have fallen considerably. In contrast, for GBP saving account deposit rates, iFAST Global Bank currently offers an annual effective rate of 3.75% with no minimum deposit requirement. For UK fixed deposits, iFAST Global Bank offers the highest rate for a three-month term at 4.2%, with a minimum deposit of just £1. Under the current scenario of declining bank rates, iFAST Global Bank's deposit rates remain quite attractive.