UK borrowing costs have jumped three times faster than other major European economies as the Iran war threatened to trigger an energy price shock.
The cost of short-term government borrowing surged at its fastest pace in nearly two years after Iran launched missile strikes on energy plants in the Middle East.
Oil and gas prices soared after the attacks, threatening to drive up inflation across the global economy.
Central banks abandoned plans to cut interest rates to stimulate growth as a result.
Andrew Bailey, the Governor of the Bank of England, said he stood “ready to act” to bring down inflation after policymakers held interest rates at 3.75pc on Thursday.
The decision led traders to ramp up bets on rate rises this year, at one point pricing in interest rates of 4.5pc before the end of 2026.
James Lynch, an investment manager at Aegon Asset Management, said bond traders were “bracing for potential rate hikes”.
The yield on two-year gilts – the return the Treasury promises to holders of Britain’s £2.9tn national debt – rocketed from 4.1pc to as high as 4.49pc in its steepest rise since August 2024.