The ructions in the bond market this week are threatening a new mortgage shock for homeowners amid fears that the Bank of England has lost control of inflation.
Britain's borrowing costs rose to the highest in the G7 for the first time since the financial crisis as Legal & General, one of the City's most powerful asset managers, said it had stopped making long-term investments in the UK debt market because of economic uncertainty.
The turmoil triggered an immediate response from lenders, with Nationwide, Britain’s biggest building society, raising rates by up to 0.45 percentage points across its mortgage range.
Fears that inflation is remaining stubbornly high, have sent borrowing costs surging back to levels last reached during then-prime minister Liz Truss’s “mini-Budget” crisis.
The Telegraph quoted Sonja Laud, chief investment officer at Legal & General Investment Management, who said: “The inflation data that we got yesterday in the UK will put a lot of pressure on the Bank of England in getting this balancing act right."
“There are inflationary pressures [in the UK] that clearly are still higher than what we see elsewhere in Europe or the US.
“We are looking more tactically at gilts because with the volatility at hand there are opportunities. But we are not engaging in the longer term, simply because of the lack of a clearer narrative,” she added.
The yield on ten-year debt rose by almost 0.2 percentage points on Thursday to 4.37%, putting it above Italy's rate of 4.35%.
It is the first time British yields have topped the G7 group of advanced economies since the dawn of the financial crisis in 2007. Even at the height of last year's mini-budget turmoil, Italy's borrowing costs were still above Britain's.
The increase is a significant challenge to the credibility of the Chancellor of the Exchequer, Jeremy Hunt and Andrew Bailey, Governor of the Bank, who sought to present themselves as competent economic managers after the chaos of Ms Truss's brief premiership.
It comes after markets were spooked by unexpectedly strong inflation data on Wednesday showing that prices rose by 8.7% last month, significantly more than the Bank's expectations of an 8.4% increase.
Traders now expect interest rates to rise to 5.5% by the end of the year, up from 4.5% at present.
Lloyds, Virgin Money and Halifax all announced small mortgage rate rises on Thursday, with more big lenders expected to do the same in the coming days.