Pound hits two-month low as Labour leadership fears rattle markets

Andy Burnham’s victory in last week’s Makerfield by-election has intensified the uncertainty, with his return to Parliament fuelling talk of a potential leadership challenge.

Investors are concerned that a Burnham-led government could increase public spending and borrowing, adding further pressure to the UK’s finances. Such a move could result in Britain having its seventh prime minister in a decade.

The cost of UK government borrowing eased slightly on Monday morning, with the yield on 10-year government bonds falling from 4.84 per cent to 4.82 per cent.

The modest improvement came after Iranian and US negotiators reported progress in peace talks, helping to calm financial markets.

However, borrowing costs remain higher than they were before Mr Burnham’s by-election victory was confirmed, when the 10-year gilt yield stood at 4.76 per cent.

UK borrowing costs have also fallen by less than those seen in France, Germany, Italy and Spain. On Friday, Britain’s borrowing costs rose faster than those of any other major European economy amid concerns that higher government spending could add to the country’s near-£3trillion debt burden.

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The broader fiscal picture remains challenging regardless of who occupies Number 10. Official data showed the UK borrowed £23.3billion in May, representing an increase of nearly a third compared with the same period last year.

This figure exceeded the Office for Budget Responsibility’s forecast by £5.6billion, with the independent watchdog having made its projections in March before the full impact of the Middle East conflict became apparent.

Interest payments on government debt reached £11.7billion in May, marking the highest level ever recorded for that month.

“The big picture is that the public finances are fragile,” said Ruth Gregory, deputy chief UK economist at Capital Economics, adding that this would constrain whoever serves as Prime Minister.

Analysts anticipate that selling pressure on UK government bonds will persist in the coming days.

Skye Masters, head of market research at National Australia Bank, said: “Amid the uncertainty around a potential challenge against the UK PM and what that means for the fiscal outlook, the likelihood is that gilts will remain under selling pressure to start the week.”

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Mr Burnham has sought to reassure markets by bringing in economic heavyweights to bolster his credentials and committing to maintain existing fiscal rules, including the prohibition on borrowing for day-to-day expenditure.

The FTSE 100 opened flat at 10,367.22, with Middle East peace hopes offsetting domestic political concerns.