The cost of UK government borrowing has decreased, partially reversing a recent spike that followed the chancellor’s emotional appearance in the House of Commons on Wednesday. The yield on 10-year UK bonds fell to 4.55%, down from 4.61% at the previous day’s close. This shift occurred as markets responded to Prime Minister Sir Keir Starmer’s comments about working “in lockstep” with Chancellor Rachel Reeves.
Meanwhile, the British pound, which had dipped on Wednesday, saw a slight recovery, rising to $1.3668. However, it has yet to fully regain its previous value. An analyst indicated that financial markets appear to be supporting the chancellor, fearing that her departure could weaken control over the government’s finances.
Market Reactions and Political Implications
Will Walker Arnott, head of private clients at Charles Stanley, remarked on the unusual scenario of financial markets bolstering a politician’s career prospects. “It looks to me like this is a rare example of financial markets actually enhancing the career prospects of a politician,” he told the BBC’s Today programme. Arnott expressed concerns that if the chancellor were to resign, fiscal discipline might deteriorate, leading to larger deficits.
Adding to this sentiment, Mohamed El-Erian, president of Queens’ College, Cambridge, and chief economic adviser at Allianz, warned that market volatility might persist. “The minute you put a risk premium in the marketplace, it’s very hard to take out,” he stated, suggesting that while some moderation might occur, a return to previous stability is unlikely.
Impact on Mortgage Market
The fluctuations in bond yields hold significant implications for the mortgage market. Higher yields can lead to more expensive mortgage deals, as they influence swap rates used by lenders to price new fixed mortgage offers. This was notably evident following the mini-budget during Liz Truss’s premiership. Recently, mortgage rates have remained stable, with lenders making modest reductions to attract borrowers.
Political Drama and Economic Policy
Chancellor Reeves’s emotional display at Prime Minister’s Questions on Wednesday followed the government’s reversal on welfare reform cuts, creating a nearly £5 billion gap in her financial plans. The initial rise in borrowing costs was linked to speculation about her potential resignation, indicating market support for her continued leadership. A Treasury spokesperson later clarified that the chancellor’s distress stemmed from a personal issue.
Prime Minister Starmer publicly supported Reeves, stating on BBC Radio 4’s Political Thinking with Nick Robinson that he and Reeves were aligned and that she was “doing an excellent job as chancellor.” On Thursday, Reeves confirmed her emotional response was due to personal reasons and reiterated her commitment to fiscal rules, emphasizing their importance for the living standards of working people and business costs.
Looking Ahead
The recent developments underscore the delicate balance between political stability and economic policy. As the UK navigates these financial waters, the chancellor’s ability to maintain fiscal discipline will be closely monitored by both markets and the public. The upcoming budget will likely reflect the costs associated with the welfare changes, potentially influencing future tax policies.
As the situation evolves, the government’s economic strategies and political dynamics will remain under scrutiny, with potential implications for both domestic and international financial landscapes.
