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Concerns over the UK’s slowing economy and accelerating inflation have spooked investors, pushing borrowing costs to their biggest premium over German debt yields since 1990.

The spread between the two countries’ bonds rose above 2.3 percentage points, the highest since German reunification and eclipsing the peak reached after the bad “mini” Budget of Liz Truss two years ago.

“Stagflation concerns are back for the UK bond market,” said Robert Dishner, senior portfolio manager at Neuberger Berman.

He added that investors were also “a little uneasy” about the extent of the Labor government’s plans for borrowing, which could increase further if weak growth restricts tax receipts.

The moves in the gilt market came ahead of the Bank of England’s final policy meeting of the year on Thursday, with investors betting on the move. inflation prevent the central bank from cutting its benchmark rate, despite the stagnating economy.

Shown in new data GDP unexpectedly fell for the second month in a row in October.

The increase in gilt The yields also took government borrowing costs back close to a one-year high hit last month after Chancellor Rachel Reeves’ October Budget, which briefly unsettled investors by raising plans to Treasury debt issuance.

Ten-year gilt yields rose 0.05 percentage points to 4.57 percent on Wednesday after figures showed UK inflation accelerated to 2.6 percent in November.

“Higher borrowing costs continue to weaken the UK’s fiscal position,” said Mark Dowding, chief investment officer at RBC Bluebay Asset Management.

“If gilt yields blow above the levels seen in the Truss tantrum, Rachel Reeves could break more promises and be forced to raise taxes or cut spending to ease concerns about debt sustainability.”

The recent rise in yields from as low as 4.2 percent two weeks ago came as traders bet the BoE will now make just two quarter-point cuts next year, down from four expected. in October.

The data “calls into question the Bank of England’s ability to cut rates,” said Craig Inches, head of rates and currencies at Royal London Asset Management.

The gap in Eurozone yields is also largely due to investors’ expectations that the European Central Bank will lower borrowing costs faster than the BoE as it grapples with a sharper slowdown in growth.

In addition, the rise in yields reflects a sell-off in the US Treasury market, where investors have cut their expectations of a 2025 Federal Reserve rate cut since Donald Trump’s election victory last month.

Economists had long expected a rebound in UK price pressures towards the end of the year, due to so-called base effects, as energy costs fell a year ago, the point of comparison. to calculate annual inflation.

However, BoE policymakers are also concerned about the scale of price increases in the service sector, as well as rapid wage growth.

Services price growth of 5 percent in November was higher than the BoE’s own forecast of 4.9 percent and above the rate seen in line with the central bank’s 2 percent inflation target.

Separate figures earlier this week showed that average weekly earnings in the UK, excluding bonuses, rose faster than expected by 5.2 per cent in the three months to October.

Higher government spending and borrowing in the Reeves’ Budget is also likely to increase inflationary pressure.

Those measures would add 0.75 percentage points to GDP and around 0.5 percentage points to consumer price inflation in about a year, according to the BoE’s latest set of forecasts last month.