UK bond markets experienced a sharp sell-off on Friday after it emerged that Chancellor Rachel Reeves had abandoned plans to raise income tax in the upcoming autumn budget. The yield on 10-year government bonds, or gilts, jumped by over 0.13 percentage points to approximately 4.575%, marking the highest level in a month.
The pound also weakened against the US dollar, dropping 0.3% to $1.3155, as investor unease mounted ahead of the make-or-break budget. Meanwhile, the FTSE 100 closed 1% lower at 9,698, amid a global market downturn driven by US economic fears.
City investors had grown increasingly comfortable with the prospect of Reeves breaking Labour’s manifesto commitments to address a potential £30bn fiscal shortfall. However, the late Thursday revelation that she would ditch income tax increases, first reported by the Financial Times, sparked a sell-off. The U-turn comes amid bitter infighting within Labour and the threat of a backbench rebellion.
Andrew Wishart, senior UK economist at Berenberg, said the move demonstrated a lack of political competence, likely increasing the probability investors attach to a change in Labour leadership. Ruth Curtice of the Resolution Foundation criticised the “excessive levels of kite flying” around the budget, which she said fuelled market volatility and called for a review of how market-sensitive forecast information is handled.
