UK borrowing costs rise and pound falls as leadership drama continues

EPA

UK government borrowing costs have reached a new 18-year high and the pound has fallen as the battle for the Labour leadership took another twist with Andy Burnham's decision to fight a by-election.

While other European government borrowing costs also rose, the UK movements have been greater, which analysts said had been fuelled by market concerns that a Burnham-led government would increase borrowing.

The 10-year bond yield - effectively the interest rate charged to the UK government for a 10-year loan - rose above 5.14% at one point on Friday, the highest since 2008.

The pound fell 0.3% against the dollar to around $1.337, having fallen sharply late on Thursday after Burnham's announcement.

Kathleen Brooks, research director at XTB, said the falls meant the pound was 1.5% lower this week.

"This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting's resignation did not have the same negative effect on the pound," she said.

Over the past week 10-year yields have surpassed levels last reached in 2008 three times, including the new high reached on Friday.

Long-term borrowing costs also rose to a new 28-year high, with the yield on 30-year gilts climbing to a peak of 5.82%.

Borrowing costs for other governments also rose on Friday, as worries persist about how the Iran war could push up inflation due to the surge in energy costs.

The price of global oil benchmark Brent crude surged on Friday morning to over $109 a barrel - up from $105.72 on Thursday - before easing to around $108.10 by 12:30 BST.

However, investors consider that a government led by Burnham would be more likely to increase Britain's already high public borrowing.

In an interview with the New Statesman last year, Burnham said the government had to "get beyond this thing of being in hock to the bond markets".

AJ Bell investment director Russ Mould said while there was no guarantee Burnham would win a seat in parliament or contest the leadership, his New Statesman comment had "helped push UK borrowing costs higher and seen the pound slump".

"A process involving Burnham also promises to be more protracted and 'noisy', thereby prolonging and exacerbating the uncertainty about the political situation in the UK," he said.

Brooks said the two key factors affecting the pound and government borrowing costs were the prospect of a shift to the left in government, and the uncertainty around the current leadership turmoil.

"Overall, UK politics is a mess, there are already signs that foreign buyers are ditching the gilt market. If there is a major rout in the pound and/or gilts in the coming days, prospective candidates may need to assess whether now was a wise time to make a move against the PM," she said.

Jefferies economist Mohit Kumar told Reuters: "Market's fear is that Burnham would be more left leaning, and we could see further increase in deficits."

UK stocks also fell on Friday, with the benchmark FTSE 100 index down 1.7%, although other European markets fell by a similar amount.

Burnham, the mayor of Greater Manchester, confirmed he would run for a seat in parliament after MP Josh Simons said he would stand down to make way for the leadership hopeful.

"We will change Labour for the better and make it a party you can believe in again," Burnham said in a statement on Thursday evening, vowing to "make politics work properly for people".

But his tilt at the top political job is far from a done deal. He will need the local party to select him as a candidate for the constituency of Makerfield, and then would need to win the by-election in a race that could be close with Reform UK.