Tears in Parliament: How a Chancellor's Emotion Sent Markets Spiraling

Borrowing costs skyrocketed and the British pound plummeted following a tearful appearance by Chancellor Rachel Reeves during Prime Minister’s Questions. This emotional display came after a significant U-turn from the government on welfare reforms that were expected to save billions. In response, the markets reacted sharply, with the pound falling by 1% against the dollar, marking the end of its upward trajectory against a weak US dollar.

The rise in borrowing costs was one of the most considerable single-day increases since October 2022, reminiscent of the turmoil caused by former Prime Minister Liz Truss’s mini-budget that ultimately led to her exit. Although Number 10 attempted to settle market concerns by assuring that Reeves would not be replaced, the borrowing costs initially eased only to surge again, reflecting ongoing uncertainty.

A spokesperson emphasized that Reeves has the full support of Prime Minister Sir Keir Starmer, who commented on BBC Radio 4 that Reeves was doing an ”excellent job”. However, the reversal of the welfare cuts leaves an almost £5 billion gap in Reeves’s financial plans, raising questions about how she will manage the government’s finances going forward.

Mike Riddell from Fidelity International noted that the fluctuations in market responses indicated a general uncertainty regarding potential changes to future policy, emphasizing that the market respects Reeves despite the turbulence. Analysts from Rabobank reflected that this uncertainty may lead to expectations of higher taxes as the government approaches the Autumn Budget. While Cabinet minister Pat McFadden maintained the government’s commitment not to increase certain taxes, he acknowledged the financial consequences of their decision to reverse cuts to disability and health-related benefits.

Experts like Simon Blundel from BlackRock suggested that the increase in borrowing costs signals heightened uncertainty concerning the government’s stability, although he noted that the current market is more resilient compared to the aftermath of the previous mini-budget crisis. Finally, the FTSE 250 index closed down by 1.34%, reflecting the adverse effects of these developments on UK-focused companies.