Borrowing costs have surged and the pound has fallen after a tearful appearance by Chancellor Rachel Reeves in parliament.
Reeves was at Prime Minister’s Questions on Wednesday following the government’s U-turn on plans to cut billions of pounds through welfare reforms.
Markets reacted after her emotional state sparked speculation about her position in government.
Sterling dropped by 1% against the dollar, ending the pound’s strong run against a weaker US currency.
Borrowing costs also soared in one of the biggest single-day moves since October 2022 when markets were in turmoil after former Prime Minister Liz Truss’s mini-budget, which eventually led to her downfall.
The rise eased slightly after Number 10 tried to quell rumours that Reeves might be replaced.
“The chancellor is going nowhere, she has the prime minister’s full backing”, a government spokesperson said, although Prime Minister Keir Starmer himself declined to give her a public show of support.
A Treasury spokesperson said Reeves upset due to a “personal matter”,
But the rise in yields then resumed, with borrowing costs remaining elevated.
The reversal of welfare reforms puts an almost £5bn black hole in Reeves’s financial plans.
The rise – at least at first – was caused by the suggestion the chancellor might step down, suggesting she retains market credibility.
But the fact borrowing costs remain higher imply that wider concerns about the government’s Budget maths are starting to materialise.
Analysts at Rabobank said “investors will be asking how Reeves will balance the books”.
They added that “the prospect of more taxation does appear to be a natural conclusion ahead of the Autumn Budget”.
Cabinet minister Pat McFadden said on Wednesday that the government would stick to its election pledge not to increase income tax, VAT or employees’ National Insurance Contributions.
But he conceded that there would be “financial consequences” to the decision to row back on planned cuts to disability and health-related benefits.
Simon Blundel, head of European fundamental fixed income investments at BlackRock, said the rise in borrowing costs “would suggest more uncertainty with regards to the current government”.
But he added that the market was “not as vulnerable as it was in 2022” in the aftermath of the mini-budget.
Some investors said that replacing Reeves now could unnerve financial markets.
Craig Inches, head of rates and cash at Royal London Asset Management, said the bond market “is largely concerned that a new chancellor will rip up Reeves’ fiscal rules and go for excessive unfunded borrowing”, along with concerns about UK growth.
The FTSE 250, which is more exposed to UK policies than the FTSE 100, closed down 1.34%.
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