Market reaction after Rachel Reeves' tears is a warning sign to Labour rebels

Labour must act quickly to restore confidence in their fiscal plans

Chancellor Rachel Reeves’ tears as Keir Starmer chose not to publicly back her at Prime Minister’s Questions may seem like a trivial matter or mere coincidence to some. However, for the markets, such emotion is a worrying sign that is hard to ignore.

Following the debate, the pound fell against the dollar and the euro, while the yields on government bonds saw the sharpest increases since Donald Trump started throwing tariffs around in April, making the UK’s sizable national debt even more expensive.

This only adds to Reeves’ problems after Labour backbenchers’ successful rebellion against the government’s plan to cut benefits, which means she must now find nearly £5 billion from somewhere.

Conservative Shadow Justice Secretary Robert Jenrick claimed it was “time for Reeves to go”, saying “she’s lost the confidence of the markets and now it seems she’s lost the confidence of the Prime Minister too”.

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Chancellor Rachel Reeves was clearly emotional during Prime Minister's Questions in the Commons (Picture: House of Commons/UK Parliament) | PA

Start of another fiscal crisis?

However, some investors fear if she is sacked – or quits in despair – her replacement could be more in tune with the Labour rebels, less committed to Reeves’ fiscal rules and more likely to let the deficit grow to alarming levels.

Kathleen Brooks, research director at brokerage firm XTB, said: “If yields continue to rise at this pace for the next few days, the PM and Chancellor will have to decide if they want to have a sensible fiscal policy whereby public sector debt is reined in, or whether they want to please the Labour backbenches, who don't seem worried by rising debt levels and forget that we are in a new era, where bond investors can shun sovereign debt in favour of less risky, less indebted corporate debt. Overall, this could be the start of another fiscal crisis for the UK."

Liz Truss’s brief stint as Prime Minister ended after her over-eagerness to introduce massive, unfunded tax cuts caused panic among investors. The situation is not that bad yet, but ministers need to act quickly to restore the markets’ confidence in their abilities. And the party’s rebels should take a moment to contemplate what will happen if they continue to undermine efforts to balance the country’s books.