The Chancellor has been warned not to spook bond markets by handing out 'big' pay rises to public sector workers.

With his crucial first Budget just over a month away, analysts say John Healey must instead focus on measures to bring down inflation.

Any populist Labour move to boost minimum wages on October 28 could do just the opposite, they say, and should be avoided.

Inflation has already risen and is under increasing pressure from surging oil prices triggered by the Iran War.

Meanwhile, a bond market sell-off around the world has pushed up borrowing costs, with investors charging the Government 5.4% on a 10-year gilt, a rate nearing 2007 levels, ominously last seen just before the financial crisis.

The Chancellor is facing a juggling act to meet spending commitments while keeping the markets and the public - and Labour voters - happy.

And with the Government being urged to act to show they are serious about economic growth, City experts and employers say another big wage rise could leave the economy teetering on the edge.

Patrick Milnes from the British Chambers of Commerce warned 'another sharp rise' in the National Living Wage following its increase to £12.71 in April would 'pile more pressure on firms already struggling under a huge cost stack'.

Meanwhile, the Treasury are also said to be hoping to balance the books by settling for smaller fiscal headroom than former Chancellor Rachel Reeves.

Typically, slashing the headroom – the margin needed to satisfy the government's own fiscal rules – sounds a dire warning to the bond markets.

But the Government could offset dropping the forecast £23.6bn cushion with other measures to keep the markets happy, said Chief Economist at investment bank Panmure Liberum Simon French.

Mr French said that slowing rises in the minimum wage could help struggling employers as an alternative to scrapping the triple lock, which investors currently favour.

He told today's Telegraph that 'even policy changes that have modest near-term impacts on fiscal headroom' would 'receive a favourable market reaction'.

Paul Dales from Capital Economics said the Government should avoid handing public sector workers big pay rises to ease inflationary pressure.

He said such 'chunky rises' would signal that they were 'not as serious about controlling inflation as they seem to suggest' when the minimum wage was already 'on a par with comparable countries' having risen 'significantly' over the last decade.

And Chief Economist at Peel Hunt Kallum Pickering warned 'excessively generous' minimum wage increases had already fuelled inflation and markets needed 'strong signals' from the Government that it is trying to avoid 'adding inflationary pressure to the economy'.

UK Hospitality Chief Executive Allen Simpson warned wage increases could also slow hiring and businesses wanted to see a 'cautious approach' to them.