UK borrowing costs climb ahead of expected rise in inflation

LONDON, Aug 18 (Reuters) - British government borrowing costs rose on Monday to their highest in months ahead of data on Wednesday that is likely to show accelerating inflation which could slow the pace of interest rate cuts by the Bank of England.

The yield on conventional 30-year gilts touched its highest since April 9 at 5.625%, up 6 basis points on the day. The yield on 2-year government bonds was also up 5 bps at 3.990%, the highest since June 9.

Borrowing costs for similar U.S. and euro zone debt rose by less than 3 basis points on the day.

The real yield on 30-year inflation-linked debt rose to its highest since at least 2010 at 2.571%, according to data from LSEG, pushing past a previous high of 2.547% set on Sept. 28 2022 during turmoil after former Prime Minister Liz Truss' mini-budget.

Official figures due on Wednesday are expected to show British inflation rose to 3.7% in the 12 months to July, almost double the BoE's 2% target.

Investors pushed back their bets on the timing of the next BoE interest rate cut. Rate futures showed a quarter-point reduction in Bank Rate was now only fully priced for March 2026. Last week, investors were fully pricing a rate cut in February.

The British central bank lowered rates for the fifth time in a year on August 7, but only after a narrow 5-4 vote by the Monetary Policy Committee.

Inflation in Britain is running higher than in the United States, where it held at 2.7% in July, and in the euro zone where it is expected to remain around the European Central Bank's 2% target over the coming years.

The BoE has forecast inflation in Britain will peak at 4% in September and remain above its target until mid-2027.

Investors are also starting to think ahead to finance minister Rachel Reeves' budget in the autumn, when many economists think she will have to raise taxes by tens of billions of pounds to stay on track to meet budget rules. (Writing by William Schomberg; editing by David Milliken)