U.K. Government Bonds, Pound Recover After Prime Minister Backs Treasury Chief – WSJ
UK financial markets saw a strong rebound on Thursday after Prime Minister Keir Starmer publicly dismissed rumors that Chancellor of the Exchequer Rachel Reeves might be stepping down.
The reassurance came just in time. Markets had taken a hit earlier in the week over fears that a change in leadership could lead to higher government borrowing. But Starmer’s clear show of support for Reeves—first in a BBC interview and later in multiple media appearances—helped ease those concerns.
In a surprise TV statement, Reeves also reassured investors that the government remains committed to sticking with its current fiscal rules, which aim to control public spending and debt.
As a result, bond yields—which had spiked sharply on Wednesday—dropped. The yield on 30-year UK government bonds fell 12 basis points to 5.30%, after surging 19 points the day before in the biggest single-day increase since April.
“The market has been really reassured by Keir Starmer’s words,” said Henry Allen, a strategist at Deutsche Bank.
Not All Worries Gone
Despite the bounce-back, investors remain cautious. The market jitters started after some Labour MPs pressured the government to cancel £5 billion ($6.8 billion) in planned welfare cuts. That move raised concerns about how the government plans to control the budget deficit.
Bruna Skarica, Chief UK Economist at Morgan Stanley, warned that the UK’s weak economic growth combined with rising debt interest costs could force the government to make some tough choices—possibly including tax hikes. “The UK has a very short track record of sticking to fiscal rules,” she noted, which keeps investors on edge.
In his BBC interview, Starmer emphasized his trust in Reeves, saying, “She and I work together, we think together… we’re in lockstep.” However, when asked directly about recent market swings, he avoided commenting.
Market Reaction
The pound rallied, leading gains among the G10 currencies until strong U.S. job numbers pushed the dollar higher again. UK stocks also rose, outpacing most European markets.
This week’s market turmoil reminded many of the 2022 financial crisis triggered by former PM Liz Truss’s controversial mini-budget, which shook investor confidence and drove up borrowing costs.
While Starmer’s backing of Reeves has calmed the storm for now, questions about the UK’s fiscal path remain—and could lead to more market turbulence as the Autumn budget approaches.
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