Borrowing costs have risen sharply and the pound has depreciated following an emotional appearance by Chancellor Rachel Reeves in Parliament.
Reeves attended Prime Minister’s Questions on Wednesday, in the wake of the government’s reversal on planned welfare reforms aimed at cutting billions of pounds.
Markets reacted negatively after her emotional state fueled speculation regarding her position within the government.
Sterling fell by 1% against the dollar, halting its recent gains against the weakened US currency.
Borrowing costs also experienced a significant surge, marking one of the most substantial single-day increases since the market turmoil of October 2022, which followed former Prime Minister Liz Truss’s mini-budget and ultimately contributed to her resignation.
The rise in borrowing costs eased slightly after Downing Street attempted to dispel rumors of Reeves’ potential replacement, but subsequently increased again.
“The chancellor is not leaving, and she has the prime minister’s full support,” stated a government spokesperson. However, Prime Minister Sir Keir Starmer refrained from publicly endorsing her.
Later on Wednesday, he told BBC Radio 4’s Political Thinking with Nick Robinson that he worked “in lockstep” with Reeves and she was “doing an excellent job as chancellor”.
A Treasury spokesperson attributed the chancellor’s emotional state to a “personal matter.”
The reversal of welfare reforms leaves a nearly £5 billion deficit in Reeves’s financial plans.
The initial market reaction was triggered by suggestions of the chancellor’s potential resignation, indicating her perceived credibility within financial markets.
“The conclusion from financial market price action this afternoon is that the market actually likes Reeves, because UK borrowing costs have jumped and the pound has weakened sharply,” said Mike Riddell, fixed income portfolio manager at Fidelity International.
“Of course it may not be about Reeves specifically,” he added. “But the market is pricing in uncertainty regarding a potential change in future policy.”
The sustained increase in borrowing costs suggests broader concerns regarding the government’s budget calculations are beginning to surface.
Analysts at Rabobank stated that “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 affirmed on Wednesday that the government remains committed to its election pledge not to raise income tax, VAT, or employees’ National Insurance Contributions.
However, he acknowledged that the decision to reverse planned cuts to disability and health-related benefits would have “financial consequences.”
Simon Blundel, head of European fundamental fixed income investments at BlackRock, indicated that the increase in borrowing costs “would suggest more uncertainty with regards to the current government.”
He added, however, that the market was “not as vulnerable as it was in 2022” following the mini-budget.
The FTSE 250, which is more sensitive to UK domestic policies than the FTSE 100, closed down 1.34%.