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UK government bonds rallied on Thursday after Sir Keir Starmer said Rachel Reeves would be chancellor for a “very long time”, allaying investor fears over her position.
The prime minister made the promise after he failed to back a tearful Reeves in the House of Commons on Wednesday, triggering a sharp sell-off in gilts and the pound.
Investors said the prospect of Reeves’ departure had raised the spectre that the government’s fiscal rules could be ditched in favour of higher borrowing.
The rally pushed yields on the 10-year gilt down 0.08 percentage points to 4.54 per cent in early trading on Thursday, reversing some of Wednesday’s sell-off, when yields jumped 0.16 percentage points. That move was the biggest one-day jump since April.
The pound, which fell 0.8 per cent against the dollar on Wednesday, recovered to trade up 0.3 per cent at $1.3670.
“The gilt market likes the ironclad commitment to the fiscal rules and chancellor Reeves’ strong track record of taking the difficult but necessary corrective actions to make sure they are met,” said Tomasz Wieladek, chief European economist at T Rowe Price.
“The market is certainly giving the chancellor a vote of confidence,” added Sanjay Raya, chief UK economist at Deutsche Bank.
In a day of high political drama on Wednesday, Reeves appeared to shed a tear when Starmer did not give the chancellor his full backing when asked about her future by Conservative leader Kemi Badenoch at Prime Minister’s Questions.
In a BBC interview broadcast late on Wednesday, however, Starmer said Reeves would be “chancellor for a very long time to come” and that the two were “in lockstep”.
Starmer also insisted that the reason for Reeves being upset had “nothing to do with politics”, echoing earlier comments from the chancellor’s spokesperson that her apparent distress had been due to a “private matter”.
On Tuesday, Starmer had gutted his controversial welfare bill as he fended off a full-scale Labour rebellion in chaotic scenes in the House of Commons, leaving a multibillion-pound hole in UK public finances.
Reeves had been one of the cabinet ministers who had urged rebels to back the legislation.
Asked about the welfare U-turn by the BBC’s Nick Robinson, Starmer said: “It was important that we took our party with us, that we got it right, and Labour politicians come into public life because they care deeply about these issues.”
Starmer declined to say whether he had been aware of the chancellor’s visible distress during PMQs. However, he said: “She’s made clear that’s a personal matter, I’m not going to go into the personal matter of a colleague.”
Nigel Farage, leader of the populist Reform UK party, said it had been “painful” to watch Reeves crying in the chamber.
“I thought she was ill to begin with. I am sorry for her, personally . . . When you work as part of a team, when one of them is limping, you help them out,” he told LBC. “[Starmer] left without saying anything to her, it looked a bit callous.”
Asked whether Reeves would still be chancellor by the next general election, health secretary Wes Streeting told Sky News on Thursday: “Of course she will.”