Bank governor urges John Healey to use budget to allay market fears amid bond turmoil

Andrew Bailey, governor of the Bank of England, has urged Chancellor John Healey to deliver a budget that reassures financial markets as UK medium-term borrowing costs reached a fresh 19-year high.

Bailey told Healey that "whatever the stance of fiscal policy, it must be credible and be seen as such by financial markets." The intervention comes as investors reduce holdings of government bonds previously treated as safe assets, driven by inflation concerns.

Bailey's statement reflects deepening anxiety in financial markets about UK sovereign debt. The jump in borrowing costs matters because it increases the interest the government must pay to service its debt. Higher interest rates on government borrowing can eventually crowd out other spending or require tax rises and spending cuts to sustain debt levels.

The Bank of England governor framed the problem as one affecting multiple governments caught in market turbulence. His message signals that the Bank views fiscal credibility, not just monetary policy, as essential to stabilizing the bond market. The Bank controls interest rates but does not directly set fiscal policy. That responsibility falls to the Treasury under Healey.

Investors offloading bonds reflects two competing pressures. On one hand, central banks have raised interest rates aggressively to fight inflation, making older, lower-yielding bonds less attractive. On the other hand, markets may be pricing in concerns about the UK's fiscal trajectory. Either scenario can push up yields, making new government borrowing more expensive.

Bailey's public urging of the chancellor suggests the Bank sees a credible budget announcement as a tool to calm markets. The next UK budget has not yet been formally scheduled. Healey has signaled his intention to announce fiscal decisions, but the timing and content remain unclear.

The 19-year high in borrowing costs puts pressure on the government's near-term finances while the Office for Budget Responsibility has already flagged tight fiscal headroom. The longer borrowing costs stay elevated, the higher the cost of servicing existing debt and any new borrowing the government undertakes.