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. The FTSE 100 closed down more than 1% at 9,698, amid a global market sell-off driven by US economic fears.
City investors had anticipated that Reeves would break Labour's manifesto commitments to address a potential £30bn shortfall in government finances. However, the decision to scrap the income tax rise, first reported by the Financial Times, came amid internal party infighting and threats of a backbench rebellion.
Andrew Wishart, senior UK economist at Berenberg bank, said the U-turn demonstrated a lack of political competence, increasing the probability investors attach to a change in Labour leadership. He warned that a shift to a more left-wing leadership could undermine fiscal sustainability.
Ruth Curtice, chief executive of the Resolution Foundation, noted that while it is normal for Office for Budget Responsibility (OBR) forecasts to change before a budget, the excessive public disclosure of such changes was fuelling market volatility. The Treasury and OBR are currently exchanging forecasts ahead of the 26 November budget.
