UK Borrowing Costs Climb And Pound Slips Amid Leadership Turmoil/ Image@ BBC
The cost of borrowing for the UK government has surged to an 18-year peak, coinciding with a decline in the value of the pound as the contest for the Labour leadership intensifies with Andy Burnham’s announcement to contest a by-election.
While borrowing costs have risen across Europe, the UK has experienced more significant increases, driven by market apprehensions that a government under Burnham could lead to heightened borrowing levels.
On Friday, the yield on 10-year bonds, essentially the interest rate for a decade-long loan to the UK government, exceeded 5.14%, marking its highest point since 2008. Concurrently, the pound depreciated by 0.3% against the dollar, settling around $1.337, following a sharp drop late Thursday after Burnham’s revelation.
Research Director, Kathleen Brooks from XTB noted that this week alone, the pound is down by 1.5%.
Brooks remarked, “This indicates that Burnham is perceived as the least market-friendly candidate, especially since Wes Streeting’s resignation did not exert the same negative pressure on the pound.”
In recent days, 10-year yields have surpassed levels not seen since 2008 on three separate occasions, including the latest high recorded on Friday. Long-term borrowing costs have also reached a new 28-year high, with yields on 30-year gilts climbing to a peak of 5.82%.
Other governments have also seen borrowing costs rise amid ongoing concerns about how the Iran conflict may exacerbate inflation through increased energy prices. On Friday morning, the price of Brent crude oil surged past $109 per barrel, up from $105.72 on Thursday, before settling around $108.10 by midday BST.
Investors believe that a Burnham-led administration would likely amplify Britain’s already substantial public borrowing. In an interview with the New Statesman last year, Burnham expressed the need for the government to move beyond reliance on bond markets.
AJ Bell investment director Russ Mould commented that while Burnham’s victory in parliament is uncertain, his statements have contributed to rising UK borrowing costs and a decline in the pound’s value. He stated, “A scenario involving Burnham could lead to a more drawn-out and turbulent process, further prolonging uncertainty regarding the political climate in the UK.”
Brooks highlighted two primary factors influencing both the pound and government borrowing rates: the potential shift towards leftist governance and the ongoing instability surrounding current leadership challenges.
”Overall, UK politics appears chaotic, with early signs of foreign investors withdrawing from the gilt market. Should there be a significant downturn in the pound or gilts in the coming days, potential candidates might reconsider whether this is an opportune moment to challenge the Prime Minister,” she added.
Jefferies economist, Mohit Kumar, stated to Reuters, “The market is concerned that Burnham may lean more to the left, potentially leading to an increase in deficits.”
UK equities also experienced a decline on Friday, with the FTSE 100 index dropping by 1.7%, mirroring similar downturns in other European markets.
Burnham, currently serving as the mayor of Greater Manchester, announced his intention to pursue a parliamentary seat after MP Josh Simons declared he would step down to allow space for the leadership contender.
”We will transform Labour for the better and restore it as a party you can trust,” Burnham expressed in a statement on Thursday evening, pledging to “ensure that politics serves the people effectively.”
However, his ambition for the top political position is far from guaranteed. He must first gain selection as a candidate from the local party for the Makerfield constituency and then secure victory in a by-election that could be competitive against Reform UK.
By: Magdalene Agyeiwaa Sarpong