The government has rejected claims that its “economic plan is not working’ as the pound headed for its biggest three-day slide in nearly two years amid a global bond sell-off centred on UK government debt.
David Lammy, the foreign secretary, defended Rachel Reeves’s stewardship of the economy and dismissed comparisons with the bond market turmoil after the Liz Truss mini-budget.
He was speaking following an urgent question in the Commons, where Mel Stride, the shadow chancellor, said the government had been “forced to make a panicked attempt to reassure the markets on the economic mess of their own making”.
Patrick Spencer, a Conservative backbencher, said: “Today borrowing costs are up, business confidence is down and growth is going nowhere. Is it not time to admit this lefty economic experiment is not working, it is time to cut taxes and cut spending.”
Darren Jones, the Treasury minister, who addressed the commons because Reeves is preparing for a trip to China, said: “The fiscal rules are non-negotiable, public services will have to live within their means, we’ve set the budget. We have the OBR [Office for Budget Responsibility] forecast coming in March, those are the numbers departments are working to in this spending review; those are the numbers we will hold public services to when we conclude the spending review in June.”
Jones rejected claims that a Treasury statement last night was an intervention in the markets.
He said: “There has been no emergency statement or emergency intervention … There is no need for any emergency intervention, and there hasn’t been one.”
Sterling fell 0.9 per cent against the dollar to $1.226 and losses for the currency across the past three days have amounted to 2 per cent, the largest since February 2023.
The pound has fallen despite a rise in UK government bond yields, which would usually bolster the currency. The weakness signals that investors are sceptical about the government’s growth ambitions and management of the public finances.
Analysts have warned that the pound has been caught up in a global flight to the dollar amid expectations for fewer interest rate cuts by the Federal Reserve and greater trade frictions after Donald Trump enters the White House on January 20. The dollar index, which measures the greenback against six comparable currencies, rose by 0.15 per cent.
Minutes from the Fed’s latest meeting released last night signalled that the central bank’s officials are minded to loosen policy gradually in the coming year, adding to the dollar’s strength.
Sterling also lost ground against the euro, however, weakening by 0.6 per cent to a near two-month low of 83.93p. The FTSE 100, which often benefits from a weaker pound, rose by 0.51 per cent, or 42.15, to 8,293.17. The FTSE 250 fell by 0.78 per cent, or 156.61, to 19,795.63.
US stocks closed higher last night, the S&P 500 increasing by 0.16 per cent and the Dow Jones industrial average by 0.25 per cent. Asian stocks lost ground in overnight trading: the CSI 300 in China slipped by 0.25 per cent and the Hang Seng in Hong Kong decreased by 0.2 per cent. The pan-European Stoxx 600 was flat.
Rates on UK government debt have risen to multi-decade highs. The yield on the 30-year government bond edged up to 5.385 per cent this morning to its highest level since 1998. The yield on the benchmark 10-year instrument was up by nine basis points in early trading before easing back down to 4.837 per cent, still the highest level since the 2008 financial crisis. Bond yields and prices move inversely.
Bond yields globally have risen quickly since the start of the year owing to speculation that inflation will be tough to stabilise if Trump causes an inflationary trade war by imposing tariffs on US imports. He denied reports this week that his team had explored a thinned-down version of his tariff plans, fuelling the bond rout.
The rise in government bond yields has all but eradicated Rachel Reeves’s £9.9 billion margin of error against her self-imposed fiscal rules, analysts said this week, strengthening the chances of tax rises or spending cuts in the coming year. Higher bond yields raise the cost of servicing government debt, which already exceeds £100 billion in the UK annually.
The chancellor lifted taxes by £40 billion at the budget in October, including a £25 billion rise in employers’ national insurance contributions, which has contributed to a sharp fall in business confidence and hiring. She has insisted that a budget of that magnitude will not be repeated.
Analysts at Deutsche Bank said that the bond sell off was more aggressive in Europe, adding that “UK gilts [have led] the declines”.
They said: “This rise in yields is adding to the risk that the government will breach their fiscal rules and have to announce further consolidation (tax rises and/or spending cuts), whilst the weaker currency will add to inflationary pressures at the same time.”
The Bank of England believes that figures published next week will show that UK inflation edged down to 2.5 per cent in December from 2.6 per cent in the previous month.
