The Treasury's study indicates that Rachel Reeves's intention to dramatically increase borrowing in the Budget could result in higher mortgage rates.

According to an official modeling exercise, the Chancellor's proposals to change Britain's fiscal regulations may result in higher borrowing costs for both individuals and companies.

A "peak increase in interest rates" of up to 1.25 percentage points might result from a "fiscal loosening" of just 1% of GDP, the Treasury research report cautions.

The document goes on to warn that every increase in annual borrowing of £25 billion could increase interest rates by between 0.5 and 1.25 percentage points.

It is widely expected that Ms Reeves will use her October 30 Budget to ease borrowing rules, a move that could unlock up to £50 billion of spending.

Treasury sources confirmed that the policy paper, which was published in December and is titled “The impact of borrowing on interest rates”, reflects the department’s current thinking.

It comes just as mortgage rates were beginning to cool, with some deals falling below 4 per cent for the time in months.

Central interest rates currently stand at 5 per cent, but a rise to 6.25 per cent would add around £200 a month to a typical mortgage.

Jeremy Hunt, the former Chancellor, said on Saturday night: “The consistent advice I received from Treasury officials was always that increasing borrowing meant interest rates would be higher for longer – and punish families with mortgages. 

“That would be a hammer blow and lead to mortgage misery for many people just at the moment the Bank of England is expected to bring interest rates back down.”

Mr Hunt has called for the Office for Budget Responsibility to be allowed to block such a decision. This is despite the UK’s debt recently surging to 100 per cent of gross domestic product for the first time since the 1960s.

On Saturday, Ms Reeves dropped her strongest hint yet that she intends to increase borrowing to fund a multi-billion-pound capital programme, pledging to “invest, invest, invest”.

It follows warnings from Sir Keir Starmer that his party’s first Budget “is going to be painful”, and it is expected that the Chancellor will raise some taxes in an attempt to plug a £22 billion black hole she claims to have found in the public finances.

It is thought this could include a raid on capital gains tax, inheritance tax or a tax on pensions.

Economists said some of the effects of higher borrowing had already been “priced in”. Yields on the 10-year gilt were at 4.13 per cent when markets closed on Friday, the highest since late July, partly reflecting concerns that Ms Reeves intends to boost borrowing in the Budget.

However, the Institute for Fiscal Studies (IFS) also warned Ms Reeves’s “opportunistic” attempt to fiddle with Britain’s fiscal rules risked causing a surge in interest rates.

The think-tank has said that any move to alter the Chancellor’s self-imposed fiscal rules “would not be without risks” and that borrowing an extra £50 billion in 2028-29 could have a “material impact on interest rates”.

Carl Emmerson, deputy director of the IFS, said: “If you borrow a lot you are taking more of a risk that interest rates will be higher in response. One lesson for Rachel Reeves is to be cautious about borrowing because there is a risk to interest rates.

“Some will have savings and will endure higher interest rates on their savings. The main risk you would worry about is people’s mortgages being a bit more expensive.”

Mr Emmerson added that the impact on mortgages would hinge on the extent to which the additional borrowing was used to fund either “current” or “capital” expenditure.

“If you inject money into an economy, there is more cash going around which could cause inflation and the Bank of England will respond with higher interest rates. This would happen if they saw a giveaway Budget that they felt wasn’t going to be beneficial to the supply side of the economy,” he said.

“But if you make some investments that perhaps encourage the private sector to invest, improve the growth rate and increase capacity of the economy to produce, you then won’t have the Bank of England’s concern that it is inflationary and that higher interest rates are needed.

The Treasury’s analysis does not take into account measures with “supply-side benefits” and notes that the impact on interest rates would be smaller “where those policies do have a material benefit for the supply side”.

The official advice from the Treasury cautions that an “unanticipated increase in spending, or reduction in taxation, that is funded by additional government borrowing, will increase the level of demand in the economy, thereby increasing inflationary pressures, which may lead to an inflation-targeting central bank increasing interest rates”.

A Treasury spokesman said: “This analysis is clear that the relationship between fiscal plans, inflation and interest rates is complicated and can change significantly over time. The Chancellor has repeatedly said she will not play fast and loose with the public finances and will protect working people.”