UK bond markets experienced a sharp sell-off on Friday after reports that Chancellor Rachel Reeves had abandoned plans for an income tax increase in the upcoming autumn budget. The yield on 10-year government bonds, known as gilts, rose by over 0.13 percentage points to around 4.575%, the highest level in a month, marking the largest single-day increase since early July.
The pound also weakened against the US dollar, dropping about 0.3% to $1.3155, reflecting growing investor unease ahead of the budget scheduled for later this month. The FTSE 100 closed down more than 1% at 9,698, amid a global market sell-off driven by concerns over the US economy.
The decision to scrap the income tax rise, first reported by the Financial Times, came amid internal Labour party infighting and fears of a backbench rebellion. Allies of Prime Minister Keir Starmer have warned he would fight any leadership challenge, with some speculating about Health Secretary Wes Streeting as a potential challenger, which he has denied.
Andrew Wishart, senior UK economist at Berenberg bank, said the U-turn demonstrated a lack of political competence, leading investors to increase the probability of a change in Labour leadership. He warned that a replacement duo positioned further left could be less committed to fiscal sustainability.
The Treasury is currently exchanging forecasts with the Office for Budget Responsibility ahead of the budget on 26 November. Ruth Curtice, chief executive of the Resolution Foundation, noted that while forecast changes are normal, excessive public speculation is fueling market volatility. She called for a review of how market-sensitive forecast information is handled.
