Keir Starmer vowed to remain as prime minister despite Labour losing hundreds of council seats across England, a move that helped calm financial markets on Friday. UK government borrowing costs fell and the pound rose as investors calculated that some of the intense pressure on Starmer’s leadership had eased.
Market Reaction to Political Stability
The yield on benchmark UK 10-year gilts dropped by 5 basis points to 4.89%, outperforming equivalent US bonds. Thirty-year bond yields, which had hit a 28-year high of 5.77% earlier this week, also fell by 7 basis points to 5.56%, their lowest in over two weeks. The pound gained three-quarters of a cent against the US dollar by mid-afternoon and edged higher against the euro.
Investors had feared that a poor showing in the local elections and devolved parliament votes in Scotland and Wales could trigger a leadership challenge. However, after Starmer insisted he would not walk away, market anxieties subsided.
Expert Analysis on Fiscal Risks
Matthew Ryan, head of market strategy at Ebury, noted that markets were concerned about higher government spending if Starmer were replaced by a more leftwing rival such as Angela Rayner, Ed Miliband, or Andy Burnham, which could lead to more tax hikes and higher borrowing. Neil Wilson of Saxo UK warned that “bond vigilantes are lurking,” attuned to political instability and the potential loss of Chancellor Rachel Reeves. He added that political risks are bound up with already rising fiscal and inflationary risks for the UK economy.
Capital Economics, a City consultancy, suggested that any replacement prime minister and chancellor would face the same challenges as the current leadership. “If Starmer/Reeves were ousted in the aftermath of what appears to be a dire performance by the government in yesterday’s local elections, we suspect the result would probably be higher interest rates and higher gilt yields than otherwise. We doubt a new leadership would be any more successful at boosting medium-term economic growth either, not least because the current fiscal constraints would remain,” the consultancy stated.
