UK borrowing costs jump amid uncertainty over PM's future

"The effective interest rate on borrowing over 10 years rose to 5.13%, near levels last seen during the 2008 global financial crisis. Financial markets have been on edge due to fears that the Iran war will push up inflation and lead to interest rate hikes, but the possibility of a change of leadership in the UK and perceived risk of looser public spending has unsettled some investors."

"Some 80 Labour MPs have called for Sir Keir to resign following poor election results last week, but the PM has told his cabinet to "get on with governing". "The Labour Party has a process for challenging a leader and that has not been triggered," he told his senior colleagues, before some voiced support for him to continue in post."

"Investors have watched the speculation surrounding Sir Keir's future closely, with analysts suggesting there is a risk that potential replacements might loosen public spending and increase borrowing by the government. The prime minister and Chancellor Rachel Reeves have consistently committed to "iron clad" rules on borrowing in a bid to reassure markets their economic plans are credible."

"Analysts at Capital Economics said they believed UK borrowing costs would rise and the pound would weaken if there was a change at the top of the Labour party. "The UK's already fragile fiscal position means that investors will be on edge for any signs of fiscal loosening," they said. "The likely replacements for Starmer/Reeves would probably not be as fiscally disciplined.""

The effective interest rate on UK government borrowing over 10 years rose to 5.13%, near 2008 crisis levels. Markets reacted to uncertainty about the future of Prime Minister Sir Keir Starmer, alongside fears that an Iran war could raise inflation and trigger interest rate hikes. Some investors were unsettled by the possibility of leadership change in the UK and the perceived risk of looser public spending. About 80 Labour MPs called for Starmer to resign after poor election results, but he told his cabinet to “get on with governing” and said the leadership challenge process had not been triggered. Analysts warned that any replacement could be less fiscally disciplined, potentially increasing borrowing and weakening the pound.

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