Rachel Reeves could be forced to make fresh cuts to public spending at her March “spring forecast” as a rise in government borrowing costs risks the chancellor breaking her own fiscal rules.

With the government under pressure on the economy, City analysts warned that Britain’s long-term borrowing costs hitting the highest level since 1998 risked wiping out almost all of a £10bn buffer the chancellor had kept in reserve at the autumn budget.

The yield – in effect the interest rate – on UK 30-year debt rose by 0.4 percentage points to 5.22%, above the peak reached after Liz Truss’s mini-budget in 2022 sparked turmoil in financial markets, to hit the highest level in 27 years.

Government borrowing costs have risen worldwide in recent weeks as investors weigh up the prospect of stubbornly high inflation forcing the world’s most powerful central banks to hold back from cutting interest rates. Investors also fear the US president-elect Donald Trump’s policies could further stoke inflationary pressures.

Growth in the UK is on track to have flatlined in the second half of last year, while inflation remains above the Bank of England’s 2% target – limiting its scope to cut borrowing costs.

Economists said if the recent rise in bond yields was sustained, it would add to the government’s debt servicing costs and could lead the Office for Budget Responsibility (OBR) to judge that Reeves was on course to break her fiscal rule to balance day-to-day spending with taxes by 2029-30.

“It suggests that the recent rise in borrowing costs has wiped out £8.9bn of the chancellor’s £9.9bn headroom,” said Ruth Gregory, the deputy chief UK economist at the consultancy Capital Economics.

While as little as £1bn would be left after the latest gyrations in bond markets, a further increase in 20-year borrowing costs of only 0.06 percentage points would wipe out all of the headroom.

“This means Reeves could soon face a nasty choice of breaking her fiscal rules or announcing more tax rises and/or spending restraint at a time when the economy is already weak,” Gregory added.

Reeves is expected to present updated OBR forecasts on the economy and public finances to parliament on 26 March. She has signalled she is unlikely to announce tax and spending changes, saying she is committed to one major fiscal event a year to give families and businesses more stability.

City analysts have questioned whether the chancellor would pass up an opportunity to take corrective action in the event of a damning OBR verdict – stoking speculation that Reeves could raise taxes.

However, the chancellor has committed not to raise taxes any further after announcing £40bn of revenue-raising measures in her autumn budget. The Treasury said on Tuesday that her fiscal rules were non-negotiable, signalling that if any adjustments were made they would come through spending cuts.

“We are not going to pre-empt the OBR’s forecast; however, no one should be under any doubt of the chancellor’s commitment to economic stability and sound public finances. That is why meeting the fiscal rules is non-negotiable,” a Treasury spokesperson said.

“The chancellor has been clear that she would not repeat the likes of October budget and is now focused on rooting out waste in public spending through the spending review and growing the economy.”

The rise in long-term borrowing costs came as the Treasury’s Debt Management Office sold £2.25bn of new 30-year bonds at a yield of 5.2%, the highest level for a 30-year gilt yield since May 1998 when Gordon Brown was the chancellor.

The Bank had forecast zero growth in the UK economy in the final three months of 2024 and has warned inflation is set to remain above its 2% target until at least 2027. The economy shrank for a second month in October, while revised figures show zero growth in the third quarter.

Investors have pared their bets for deeper rate cuts from the central bank, with financial markets now anticipating only two reductions in 2025, compared with as many as four a couple of months ago.

US 10-year bond yields rose to an eight-month high on Tuesday amid investor concerns over Trump’s policies and ahead of a Treasury auction of $39bn (£31.2bn) of new debt.

Eurozone borrowing costs have also risen after figures this week showed inflation jumped to 2.4% in December, dampening expectations for a large rate cut from the European Central Bank later this month.