UK borrowing costs surge following Labour government's tax-hiking budget announcement.

After the Labour Party announced tax hikes and increased borrowing, U.K. bond yields rose sharply in London on Thursday.

The 2-year gilt yield had increased by 20 basis points to 4.5% by 2:33 p.m. in London, while the 10-year yield had also risen by 15 basis points to 4.5%.

The budget announcement by Finance Minister Rachel Reeves on Wednesday led to an increase in yields, as it included plans for £40 billion ($52 billion) in tax hikes and a commitment to higher borrowing in the future.

Yields move in the opposite direction to prices.

Rising yields on Wednesday have prompted analysts at ING to predict a significant increase in borrowing over the next few years, they stated in a note.

"Although we have maintained that the government had no other option but to increase real-terms spending, the actual outcome has exceeded many people's expectations, including our own."

According to the Office for Budget Responsibility's forecast, borrowing will be £36 billion higher annually over the next five fiscal years due to the time it takes for additional tax revenue to be realized.

Although significant developments have occurred this week, the gilt market is showing more stability compared to September 2022, when the U.K. experienced its "mini-budget crisis."

Former Prime Minister Liz Truss of the Conservative Party announced billions in unfunded tax cuts, which led to severe bond market swings and threatened to destabilize U.K. pension funds. The Bank of England intervened, and Truss was forced to reverse the majority of the changes and resign within weeks.

The U.K. inflation has dropped sharply since the Truss era, leading analysts to predict that bond market volatility would not repeat itself ahead of the October 2024 budget. The latest headline print was 1.7% versus 10.1% during Truss's premiership, which economists said would make markets more tolerant of fiscal expansion.

On Thursday, the British pound was 0.4% lower against the U.S. dollar at $1.2908, while sterling was down 0.46% against the euro at 2:46 p.m.

In mid-afternoon deals, the U.K.'s stock market was 1.04% lower, reflecting losses in broader European equities.

The U.K. budget market reaction may have been hindered by strong European data increasing yields on the continent and the general upward pressure on U.S. yields due to Trump's recent poll improvement.

The Wednesday budget was likely two-thirds of the Truss mini-budget in terms of fiscal easing, but the higher borrowing is intended to boost investment rather than finance tax cuts.

Reid stated that those investments will not yield growth until after the 5-year timeframe.

— CNBC's Ganesh Rao contributed to this story