Doubts over Sir Keir Starmer's future are harming UK economy: Greg Wright

UK long-term borrowing costs have surged to a 28-year high and the pound weakened as Sir Keir Starmer’s leadership came under intense pressure.

The yield on 30-year UK government bonds – also known as gilts – jumped as much as 13 basis points to 5.807 per cent in Tuesday morning trading, reaching the highest level since 1998 as Sir Keir faced calls from within his own party to quit. The yield on 10-year gilts also rose back above 5 per cent, lifting by as much as 11 basis points to 5.11 per cent, but remained below recent highs reported last month. Gilt yields move counter to the value of the bonds, meaning their prices fall when yields rise. Rising yields on these bonds mean it costs more for governments to borrow from financial markets.

So why does this matter? The brutal fact is that the potential risk of looser public spending under a new Prime Minister and Chancellor has rattled investors. Nothing worries the markets quite like the prospect of increased Government borrowing.

Neil Wilson, Saxo UK’s investor strategist, warned about the potential for further market volatility and a mounting gilt rout until leadership clarity is achieved.

He said: “Markets tend to dislike a lack of certainty over who runs a government; the fiscal position is already fragile and likely to become worse should a left-leaning ticket prioritise spending; and that this makes inflation stickier.”

He added: “A leftwards lurch would raise hackles among bond vigilantes at a time when the fiscal position is already fragile, and risks are rising due to rising inflation from soaring energy prices and weaker growth outlook for the economy."

Dan Coatsworth, head of markets at AJ Bell, said: “As well as the general uncertainty created by this leadership crisis, the fear stalking gilts is that his (Sir Keir’s) replacement might be less committed to the fiscal rules set out by Starmer and his chancellor Rachel Reeves.”

Gilts will remain sensitive to any further political developments, said Mr Coatsworth. “The geopolitical backdrop doesn’t help – with Trump’s comments on the fragile peace between the US and Iran helping to stoke oil prices once again."

The crisis of the last few days epitomises the muddle which has characterised so many of the Government’s actions. Backed by a colossal majority, Labour had a mandate to be bold. Too frequently it has been timid and confused; with frustration about Sir Keir’s leadership finding its most dramatic expression in last week’s local election results. In clinging so tenaciously to his occupancy of Downing Street, Sir Keir is demonstrating a drive and passion which has been sadly lacking over the last two years. The markets – and voters – demand strength and clarity. Only the Prime Minister knows if he can finally display these essential qualities.

Greg Wright is the deputy business editor of The Yorkshire Post