UK government borrowing costs fell and the pound strengthened on Friday after Prime Minister Keir Starmer insisted he would remain in office despite Labour suffering heavy losses in local elections across England.
Financial markets reacted positively after investors concluded that immediate pressure on Starmer’s leadership had eased, with Labour’s losses appearing less severe than some analysts had feared.
The yield on benchmark 10-year UK government bonds, known as gilts, dropped by five basis points to 4.89 percent. Thirty-year gilt yields also declined sharply, falling seven basis points to 5.56 percent after recently reaching their highest level in nearly three decades.
Meanwhile, the pound rose against both the US dollar and the euro as confidence stabilised following days of political uncertainty.
Earlier in the week, UK borrowing costs had climbed amid speculation that poor local election results in England, Scotland and Wales could trigger a challenge to Starmer’s leadership.
However, after the prime minister publicly ruled out stepping down, investors appeared reassured that the government’s current economic direction would remain intact.
Matthew Ryan, head of market strategy at Ebury, said markets had been concerned about the possibility of a more left-wing Labour leadership emerging.
He suggested investors feared that figures such as Angela Rayner, Ed Miliband or Andy Burnham could support higher public spending funded through increased taxation and borrowing.
Neil Wilson, investor strategist at Saxo UK, warned that financial markets remain highly sensitive to political instability and concerns surrounding the UK economy.
He said investors were closely monitoring risks linked to Chancellor Rachel Reeves potentially losing her position if Starmer’s leadership came under renewed pressure.
“Political risks associated with a Starmer/Reeves defenestration are bound up with already rising fiscal and inflationary risks for the UK economy,” Wilson said.
Economists at Capital Economics argued that any replacement leadership would likely face the same economic challenges currently confronting the government.
The consultancy warned that removing Starmer and Reeves after disappointing election results could potentially lead to higher interest rates and increased gilt yields rather than improved economic confidence.
Analysts also questioned whether alternative Labour leadership figures would be able to significantly improve long-term UK economic growth given existing fiscal pressures and budget constraints.
The pound gained roughly three-quarters of a cent against the US dollar during Friday trading and also edged slightly higher against the euro.
The market reaction reflects ongoing investor focus on political stability, government borrowing, and economic policy direction as the UK continues to face inflationary pressures, weak growth forecasts, and concerns over public finances.
