The pound sank for a fifth day in a row yesterday and long-term government borrowing costs hit a fresh 27-year high amid deepening fears over Labour’s stewardship of the economy.
In another setback to Rachel Reeves as she returned to the UK after a trip to China, sterling slumped by as much as a cent to a 14-month low of $1.21 against the US dollar.
The currency is 10 per cent below its pre-Budget peak in September and has fallen by nearly five cents in just a week.
The pound also lost ground against the euro, languishing below €1.19 at a two-month low.
And yields on 30-year gilts climbed close to 5.5 per cent, the highest since 1998, while ten-year yields hovered around 4.9 per cent, close to the 17-year high reached last week.
Gilts are bonds sold by the UK Government to raise money. When their prices fall, yields rise.
Slump: The pound is now 10% below its pre-Budget peak in September and has fallen by nearly five cents in just a week
Higher yields mean investors are demanding higher returns for lending to Britain. In a further headache for ministers and the Bank of England hoping to keep a lid on inflation, the price of a barrel of Brent crude rose to $81.68, a five-month high.
The latest moves add to the turbulence seen on markets last week – which was set off by jitters over US borrowing and inflation but quickly saw investors turn on Britain amid doubts that Reeves’s tax and spending plans will hold together.
The rise in bond yields has further limited the Chancellor’s options, adding an estimated £10billion a year to Britain’s debt interest bill.
It is likely to mean Reeves either having to cut spending or raise taxes again.
Kathleen Brooks, research director at broker XTB, said anxiety over UK public finances would continue until the Government takes action to address it
She said: ‘The bond market is attempting to intimidate Chancellor Rachel Reeves into forcing the UK to live within its means.
‘We think the bond market will get its way.
‘The Labour Government may well get the UK on a secure fiscal footing, but it may not do it in the way it had wished for when it came to power last year.
In 2025, public sector spending is out. Rachel Reeves needs to acknowledge this before the bond market will calm down.’
Pressure: Chancellor Rachel Reeves may be forced to choose to cut spending or raise taxes again
The turbulence comes as the Bank of England weighs up its next interest rate move, with markets betting there will be two cuts this year, starting next month.
Its decision is complicated by the prospect that the US Federal Reserve will have to slow down, as Donald Trump’s trade and tax policies threaten to stoke inflation in America.
That could put pressure on the Bank of England to hit pause too as the prospect of rates being cut much faster here and in the US would add to pressure on the pound.
But experts think the Bank may be pushed towards quicker cuts if the growth outlook continues to deteriorate.
The latest market turmoil comes at the start of a key week for the economy with inflation and gross domestic product (GDP) figures to be published.
Inflation figures tomorrow are expected to show it remained at a stubbornly-high 2.6 per cent in December, above the Bank’s 2 per cent target. Deutsche Bank’s UK economist Sanjay Raja said: ‘The spectre of stagnation now looms large in the UK.’
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