Government says ‘no need for emergency intervention’ in financial markets
Uncertainty over fiscal stability and wider global pressures caused sterling to weaken on Thursday.
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.The Government has said there is “no need for an emergency intervention” as it sought to soothe concerns over the UK’s shaky financial markets.
On Thursday, the value of the pound fell to its lowest level in over a year while UK borrowing costs jumped to their highest since the 2008 financial crisis.
Uncertainty over fiscal stability and wider global pressures caused sterling to weaken, with the pound falling nearly 1% to just under 1.23 US dollars – its lowest level since November 2023 – before trimming its losses during afternoon trading. It was 0.58% lower at the close of trading in London.
The FTSE 250 stock index also slid to its weakest level for nine months before staging a recovery later in the session. It was 0.27% higher at the close.
Treasury minister Darren Jones said that the markets were functioning in an “orderly way”, stressing that the Government’s fiscal rules are “non-negotiable”.
It came as economists warned that Chancellor Rachel Reeves could be forced into further tax hikes or cuts to spending plans to meet UK fiscal rules due to a potential rise in the Government’s debt interest bill.
The Institute for Fiscal Studies (IFS) said the Government’s “razor-thin margin” to meet its rules could be easily eroded if interest rates stay higher.
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, which is the highest since 2008.
These yields settled later on Thursday afternoon, sitting one basis point higher for the day at 4.82% when London’s market closed.
The cost of longer-term borrowing also continued to rise, with the yield of 30-year gilts lifting to their highest level since 1998.
They were up around three basis points to a peak of 5.39%, before closing at 5.38%.
The rise in gilt yields has an inverse effect on the price of these government bonds, which are falling as a result, with some saying the current market woes echo those seen in the fallout from the disastrous mini-budget of former prime minister Liz Truss in 2022.
The rise in the cost of servicing government debts could cut into Labour’s expected financial headroom in a potentially worrying sign of how investors see fiscal sustainability in the UK.
The UK’s fiscal position continues to look perilous
Mr Jones told MPs in Parliament on Thursday: “In recent months, moves in financial markets have been largely driven by data and geopolitical events, which is to be expected as markets adjust to new information.
“UK gilt markets continue to function in an orderly way and underlying demand for the UK’s debt remains strong.”
He stressed that the Government witnessed strong demand in its latest tranche of planned gilt sales on Wednesday.
Mr Jones also defended the Chancellor after calls from the opposition benches that she should halt a planned to trip to China to appear before Parliament.
In response to a question, he said: “There is no need for any emergency intervention and there hasn’t been one.”
Shadow chancellor Mel Stride said: “Despite what (Mr Jones) says about international factors, the premium on our borrowing costs compared to German bonds recently hit its highest level since 1990.
“With these rising costs, regrettably the Government may now be on course to breach their fiscal rules and the Chancellor has committed to no further tax rises.”
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.
Globally, there has also been a wider sell-off in government bonds in recent months in the face of worries that US President-elect Donald Trump could introduce a tariff policy which would be inflationary for many international economies.
US Treasury yields have also been moving firmly higher after reports of resilience in the US economy have cast doubts over expectations for further cuts to interest rates.
Kathleen Brooks, research director at XTB, said while still under pressure, the pace of the “relentless” bond sell-off had eased on Thursday.
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 £9.9 billion of headroom to meet her revised fiscal rules. This came despite a £40 billion package of tax increases to fuel higher spending.
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.