Rachel Reeves is scrambling to calm markets today as the Pound falls and government borrowing costs rise again.
Sterling tumbled to its lowest level against the US dollar for over a year this morning as investors heaped more risk premium on UK gilts – the way the state finances its activities.
The grim moves ramp up pressure on the Chancellor, with economists warning that with growth stalling and ‘sticky’ inflation she will struggle to balance the books unless she cuts spending or hikes taxes again.
The Treasury has insisted Ms Reeves views her fiscal rules, including balancing day-to-day spending by 2029, as ‘non-negotiable’.
Speaker Lindsay Hoyle has accepted an urgent question in the Commons at 10.30am so a minister can be grilled about the burgeoning crisis.
Yields on government bonds have been rising around the world amid fears over economic prospects and Donald Trump potentially imposing tariffs.
However, the impact has been particularly acute in the UK after the October Budget pumped up borrowing to invest in infrastructure and mounted a huge tax raid on business to fund spending.
The pound dropped nearly 1 per cent to just under 1.23 US dollars – its lowest level since November 2023.
Yields on government bonds – which reflect the cost of government borrowing – continued to rise, up eight basis points to 4.89 for 10-year gilts. That is the highest since 2008.
The cost of longer-term borrowing also continued to rise, with the yield of 30-year gilts at their highest level since 1998.
They were up around three basis points to a peak of 5.39 per cent.
Some analysts believe the problems are more serious than after Liz Truss’s disastrous mini-Budget in 2022.
The rise in the cost of servicing government debt is thought to have wiped out Labour’s expected financial headroom.
The gilt rout has been sparked by investor worries over rising government borrowing and the mounting threat of so-called ‘Stagflation’, where the economy sees rising inflation combined with stalling growth.
US Treasury yields have also been moving firmly higher after signs of strength in the economy cast doubts over expectations for further cuts to interest rates.
Kathleen Brooks, research director at XTB, said while still under pressure, the pace of the ‘relentless’ bond sell-off had eased.
But she stressed the pound’s reaction shows ongoing concerns in the market.
‘The UK’s fiscal position continues to look perilous,’ she said.
‘The Chancellor is expected to make a speech in the coming days, where she may focus on public sector spending cuts rather than further tax increases to meet her fiscal rules.
‘However, the rhetoric from the Labour government is one reason we are in this mess in the first place, and there are no guarantees that Reeves will be able to calm the market.’
The rise in government borrowing costs poses a challenge for Ms Reeves, putting pressure on the Treasury’s ability to increase public spending amid the prospect of higher interest costs.
After the autumn Budget, Ms Reeves was left with only £9.9billion of headroom to meet her revised fiscal rules.
This came despite a £40billion package of tax increases to fuel higher spending.
Higher debt interest costs may mean the Chancellor would need to trim spending plans or bring in more revenue than expected to meet the fiscal rules.
The Chancellor committed last year to having only one fiscal tax-changing event a year, which is expected in the Autumn, leaving many to expect that she will opt to rein in spending plans in her March fiscal statement.
Economists said a spike in rates could leave the Chancellor facing a £10billion-a-year increase in debt interest payments – putting her on course to break her own fiscal rules.
Treasury sources last night acknowledged Ms Reeves could be forced to act as soon as March if sceptical financial markets continue to raise the cost of borrowing.
Shadow business secretary Andrew Griffith said: ‘Tragically, the gilt markets can see that the Government’s growth plan is dead on arrival.
‘It takes a certain level of incompetence to fiddle your fiscal rules and then still risk missing them.’