The British pound tumbled to its lowest level in over a year on Thursday as a relentless sell-off in the UK government bond market gathered pace, sparking fears of a brewing sterling crisis. The intensifying rout piled further pressure on Chancellor Rachel Reeves, who has struggled to reassure investors since taking office last year.
Sterling slid by a cent against the US dollar to trade around $1.226, extending its recent losses and hitting its weakest point since November 2023. The drop came as yields on UK sovereign debt surged again, with borrowing costs on benchmark 10-year gilts climbing as high as 4.921% – a level not seen since the depths of the 2008 financial crisis.
Bond Market Mayhem Rattles Investors
The renewed turmoil in the gilt market has stoked concerns that investors are losing faith in the UK government’s ability to get a grip on the nation’s fiscal position. Reeves has come under fire in recent months over her handling of the economy and public finances.
“We’re not at the Truss/Kwarteng stage just yet, but things are clearly on very shaky ground indeed,” warned Michael Brown, senior research strategist at brokerage Pepperstone. He was referring to the disastrous mini-budget unveiled by former Prime Minister Liz Truss and then-Chancellor Kwasi Kwarteng in September 2022, which triggered a similar bond market rout and sent sterling spiraling.
Reeves Tries to Calm Jitters
In an unusual move, Chancellor Reeves released a statement late Wednesday insisting she has an “iron grip” on the UK’s coffers. It marked her second public intervention in as many days as the government races to quell the burgeoning market panic.
Despite the Chancellor’s best efforts, sterling slid further on Thursday while the UK’s borrowing costs continued their relentless march higher.
Some analysts warned that the pound’s precipitous fall, coupled with spiking bond yields, carried echoes of crises past. Martin Weale, a former Bank of England policymaker, suggested the current market anxiety bore a closer resemblance to the UK’s infamous 1976 bailout than the Truss budget debacle.
Firms Fret Over Tax Hikes
Compounding the gloomy outlook, a Bank of England survey released Thursday showed more than half of UK businesses plan to raise prices or slash jobs in response to Reeves’s looming increase in employer National Insurance contributions.
- 61% expect to take a hit to profit margins
- 54% plan to hike prices for customers
- 53% anticipate cutting their workforce
- 39% will likely reduce employee pay
The findings highlight the precarious position the Chancellor finds herself in. She is attempting a delicate balancing act between shoring up the battered public finances and avoiding tipping the economy into a painful recession.
No Easy Path Ahead
As the bond market rout deepens and sterling flounders, the Chancellor faces an unenviable task in trying to calm investors and restore confidence. With the UK economy already on shaky ground, Reeves will need to carefully weigh her next moves to avoid derailing the fragile recovery entirely.
But with public borrowing soaring, tax revenues under pressure, and inflation still running hot, she has precious little room for maneuver. The coming weeks and months will severely test the Chancellor’s mettle as she attempts to guide the UK through these treacherous economic and financial crosscurrents. For now, though, the relentless market turmoil shows no signs of abating.
