Pound falls as Burnham’s rise sparks investor concern over UK fiscal rules

LONDON, ​June 22 — The pound eased on Monday, as speculation mounted that Prime Minister Keir Starmer could set out a timetable for his departure imminently, paving the ‌way for Andy Burnham to become Britain’s seventh leader since the Brexit vote a decade ​ago.

Sterling, which has lost some 3 per cent since pressure on Starmer began to heat up in February, was down 0.2 per cent at US$1.321. Britain already has the highest borrowing costs in the Group of Seven wealthy nations due to its ​high debt and interest payments, years of anaemic economic growth, its struggles to cut spending and the need to invest in areas like defence.

The threat to Starmer, whose popularity among voters has nose-dived over his handling of the economy, ramped up on Friday when Burnham, the former Greater Manchester mayor, decisively won a parliamentary election to return to Westminster.

“The most ‌important question relates to Mr Burnham’s approach to fiscal policy, his pick of Chancellor and ⁠whether he will stick to the fiscal rules,” Nomura ⁠economist George Buckley said.

The options market shows traders are willing to ⁠pay more to hedge against volatility ⁠in the pound in ⁠the coming weeks than they were on Friday.

Key for investors is the UK gilt market, where yields at around 4.85 per cent are not far off their highest since the 2008 financial crisis, meaning Britain ⁠must pay more for its medium-term borrowing needs than any other developed nation.

Repeated political crises and concern over Britain’s stretched finances have made investors wary of gilts, which are prone to far higher volatility than many other government bonds.

Burnham is viewed as being more left-leaning than Starmer and although he has said he will stick to incumbent finance minister Rachel Reeves’ tight fiscal ⁠rules, investors will need to see proof.

“Burnham has said that he would respect fiscal rules. However, it is not obvious where the money for any additional spending will come from. ⁠Taxes have reached a stage where further rise (s)... would be counterproductive. Efficiency savings look good on ⁠paper, but ⁠never realistically work,” Jefferies strategist Mohit Kumar said.

“We have stayed away from the long end of the gilts ​curve, have steepeners in our portfolio and have been underweight sterling. ​We are maintaining our view and expect further volatility ‌in the UK long end over the coming days,” ​he said, referring to a position ​that assumes shorter-dated bonds will perform better than longer-dated ones, given the concern about Britain’s long-term finances. — Reuters