Chancellor Rachel Reeves Faces Increasing Pressure as Market Instability Escalates

The pound has dropped to its lowest level in 14 months against the US dollar, as a bond market sell-off exacerbates fears surrounding UK assets, putting added pressure on Chancellor Rachel Reeves. Sterling fell by a cent to approximately $1.226, extending its recent decline as investor anxiety continues to mount.

Despite the government’s efforts to reassure markets, UK borrowing costs increased once again on Thursday morning, highlighting the ongoing instability. In response to the growing concerns, Reeves issued a rare public statement for the second consecutive night on Wednesday, asserting that she maintained an “iron grip” on the nation’s finances.

Michael Brown, Senior Research Strategist at brokerage firm Pepperstone, warned that the situation was becoming increasingly concerning. He remarked that the rise in bond yields and the fall of the currency indicated a loss of investor confidence in the government’s ability to manage the fiscal environment effectively. While he noted that the current situation was not yet as severe as during the Truss/Kwarteng era, he emphasised that the economic foundation appeared to be quite fragile.

Bond yields continued to rise on Thursday, with the interest rate on 10-year UK debt climbing to 4.921% in early London trading – a level not seen since 2008. Thirty-year bond yields, which had already hit 28-year highs earlier this week, increased again, reaching 5.474%.

Chris Turner, Global Head of Markets at ING, explained that the global bond market sell-off had triggered a reaction in the UK gilt market, leading investors to scale back their bets on the pound. Investors, who had previously viewed sterling as a strong counter to the dominant US dollar, are now rethinking their positions in light of the sell-off in gilts.

Although the pound is still above its record low following the 2022 mini-budget, when it neared parity with the dollar, the current market turmoil is raising concerns. Former Bank of England policymaker Martin Weale compared the present situation to 1976, when a sharp fall in the pound led the Labour government to seek a bailout from the International Monetary Fund (IMF), coupled with stringent spending cuts. Weale, now a professor at King’s College London, pointed out that the combination of a weakening currency and rising long-term interest rates is similar to the events of 1976, which could be a scenario that haunts the Chancellor.

In addition to these market concerns, a Bank of England survey of UK firms revealed that over half of the companies in the UK are preparing to raise prices or reduce jobs as a result of Reeves’s increase in employers’ national insurance contributions, set to take effect in April. The survey found that 61% of firms expect to lower profit margins, 54% plan to increase prices, 53% anticipate reducing employment, and 39% expect to offer lower wages in response to the increased NICs. The results underscore the challenges faced by businesses and reflect the growing uncertainty within the UK’s economic landscape.