Rachel Reeves was urged to cancel a trip to China today as she scrambles to calm markets with the Pound falling and government borrowing costs rising again.
The Tories and Lib Dems insisted the Chancellor should drop plans to head for Beijing this weekend amid mounting alarm at the situation.
Sterling tumbled to its lowest level against the US dollar for over a year this morning as investors continued to push up risk premium on UK gilts – the way the state finances its activities.
Economists warned that with growth stalling and ‘sticky’ inflation Ms Reeves will struggle to balance the books unless she cuts spending or hikes taxes again.
Some analysts believe the problems are more serious than after Liz Truss‘s disastrous mini-Budget in 2022 – with comparisons even made to the 1976 IMF bailout.
The unusual combination of the currency weakening and gilt yields increasing is seen as particularly worrying, with a Bloomberg index pointing to low liquidity in the bond market.
The Treasury has insisted Ms Reeves views her fiscal rules, including balancing day-to-day spending by 2029, as ‘non-negotiable’.
But the Chancellor refused to come to the Commons to answer an urgent question on the borrowing costs this morning – instead sending her deputy Darren Jones.
MPs shouted ‘where is she’ as Mr Jones argued that the markets were functioning in an ‘orderly way’.
Rachel Reeves is scrambling to calm markets today as the Pound falls and government borrowing costs rise again
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 pound dropped nearly 1 per cent to just under 1.23 US dollars – its lowest level since November 2023
But the Chancellor refused to come to the Commons to answer an urgent question on the borrowing costs this morning – instead sending her deputy Darren Jones (pictured)
Mr Jones said: ‘Financial market movements, including changes in Government bond or gilt yields, which represent the Government’s borrowing costs, are determined by a wide range of international and domestic factors.
‘It is normal for the price and yields of gilts to vary when there are wider movements in global financial markets, including in response to economic data.
‘In recent months, movement in financial markets has been largely driven by data and global geopolitical events, which is to be expected, as markets adjust to new information.’
Mr Jones added: ‘The Chancellor has commissioned the Office for Budget Responsibility (OBR) for an updated economic and fiscal forecast for March 26, which will incorporate the latest data. Only the OBR’s forecast can accurately predict the effect on the public finances of any changes in financial markets or the economy, and I will not pre-empt their forecast.
‘There should be no doubt of the Government’s commitment to economic stability and sound public finances; this is why meeting the fiscal rules is non-negotiable.’
As MPs accused Ms Reeves of having ‘fled to China’, Mr Jones replied: ‘The Chancellor is going on her trip to China, it has been well documented for many weeks, an important visit in terms of trade and investment in the economy here in the UK.
‘And might I just say there was no emergency statement, or emergency intervention, these are make-belief words being propagated by members on the benches opposite. The Treasury responded to requests from journalists about headroom, as we might do in the normal way.’
Shadow chancellor Mel Stride said outside of the chamber: ‘Today Labour has been forced to make a panicked attempt to reassure the markets on the economic mess of their own making.
‘But Rachel Reeves is missing in action – instead wheeling out her deputy to defend her loss of control of the public finances.
‘The Chancellor should now cancel her travel and focus on this country instead.’
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.
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.
Tory former chancellor Lord Hammond said he thought Ms Reeves should still go to China.
But he added: ‘I think we now need a message from the Chancellor that she understands the concerns of business and that she is going to put business investment and economic growth at the very front of her agenda.’
The IFS think-tank said the rise could add around £8billion to spending if sustained. ‘If recent rises in interest rates were to persist, they could easily erode most of razor-thin margin against the main fiscal rule,’ researcher Isabel Stockton said.
‘But the issue here is not so much that the past month has been especially eventful, but more that the margin was so small to begin with.
‘If continuing to meet the fiscal target requires new tax rises, or cuts to the already tight looking spending envelope for the subsequent spending review, then the Chancellor – and we – should not be surprised.’
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.
Although the rise in gilts yields has been slower than the response to Liz Truss’s (pictured) mini-Budget in 2022 analysts have warned the situation is ‘more dire’ now
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.’