Pressure mounts on Reeves as Starmer refuses to guarantee future of her job
Sir Keir Starmer declined to say the Chancellor would remain in post until the election.
Rachel Reeves is under intense pressure after Sir Keir Starmer refused to guarantee her long-term future in No 11 as the value of the pound fell and Government borrowing costs remained high.
The Prime Minister said the Chancellor had his “full confidence” and was doing a “fantastic job” but declined to say she would remain in No 11 for the duration of the parliament.
Sir Keir acknowledged it will take time to turn the economy around as Ms Reeves faces the prospect of rising borrowing costs forcing her to slash spending or hike taxes to balance the books.
The pound fell to a fresh 14-month low on Monday, slumping another 0.6% to 1.21 US dollars after last week hitting its lowest level against the dollar since November 2023.
UK government bonds – also known as gilts – continued to see 10-year yields hit fresh highs not seen since 2008, at 4.9%.
The yield on 30-year gilts also hit new 27-year highs, up five basis points at 5.5% at one stage in early trading before easing back to settle at around 5.4%.
Yields are a key indicator of market confidence, moving inversely to bond prices.
They rise when investors are less willing to own the debt, meaning they will pay a lower price for the bonds.
Answering questions following a speech in London the Prime Minister stressed that the Government would meet its “fiscal rules” – including requiring day-to-day spending to be met from revenues rather than further borrowing.
But rising borrowing costs eat into the funding available, which could force Ms Reeves to act to either reduce spending or raise taxes to comply with her rules when the Budget watchdog gives its updated forecast in March.
Answering questions following a speech in London Sir Keir said: “We’re going to stick to the fiscal rules. That is a very important thing that we’ve said throughout.”
He said changes to planning rules, the industrial strategy and embracing artificial intelligence would fuel growth.
“That is why I’m confident in our mission for growth and I’m confident, completely confident in my team.”
But, he added: “We never pretended, nor would anybody sensibly argue, that after 14 years of failure, you can turn around our economy and our public services before Christmas.
“Before the election, I said it’s not going to be possible to do this in six months. It’s going to take time.”
Pressed again on the Chancellor’s future, he said: “Rachel Reeves is doing a fantastic job. She has my full confidence. She has the full confidence of the entire party.”
He said the Government would be “ruthless” in its approach to public spending.
Prime ministers are often reluctant to give guarantees about the futures of individual Cabinet members as they need to have flexibility to respond to events and reshuffle their team.
But Downing Street has previously indicated that Foreign Secretary David Lammy would serve for the duration of the parliament.
Tory leader Kemi Badenoch said Ms Reeves was “hanging on by her fingernails”.
She said: “The Prime Minister just refused to back his Chancellor staying in her job.
“Keir Starmer and Rachel Reeves have driven Britain’s economy into the ground.”
Some traders fear there could be a deepening slump for the pound, which has been hit hard by the gilt market woes, as well as stubborn inflation, high government borrowing and concerns over incoming US president Donald Trump and his plans for tariffs on overseas trade.
Sterling’s weakness has been compounded by a stronger dollar, as markets see fewer interest rate cuts coming down the line.
Official figures due on Wednesday are set to show another rise in UK inflation, which could deepen the pound’s troubles.
There are worries over a knock-on effect on mortgages and pensions from the gilt market rout.
Critics have drawn parallels with the fallout from former prime minister Liz Truss’s disastrous 2022 mini-budget when the pound was sent crashing due to an acute sell-off in gilts.
Kathleen Brooks, research director at XTB, said worries over UK government debt levels will not go away until the Government announces measures or spending cuts to address it.
She said: “The bond market is attempting to intimidate Chancellor Rachel Reeves into forcing the UK to live within its means.
“We think the bond market will get its way.
“The Labour Government may well get the UK on a secure fiscal footing, but it may not do it in the way it had wished for when it came to power last year.
“In 2025, public sector spending is out. Rachel Reeves needs to acknowledge this before the bond market will calm down.”
The increase in the cost of servicing Government debts is seen cutting into Labour’s already slim £9.9 billion financial headroom.
The Chancellor has previously ruled out both increasing borrowing and raising taxes following the significant tax increases in October’s Budget, leaving her with few options beyond further spending cuts.
But it is not thought the UK is facing a Truss-style crisis just yet, with the levels of volatility in markets not on the scale of the panic-driven sell-off seen in 2022, and the pound in a stronger position than it was then, when it crashed to its lowest level against the dollar since 1985.
