Sterling hit as pressure mounts on Starmer
The pound came under pressure on Thursday, amid concerns over the future of Sir Keir Starmer’s leadership.
The pound weakened 0.8 per cent against the dollar to $1.354, and shed 0.7 per cent against the euro. It extended earlier declines after the Bank of England held interest rates at 3.75 per cent in a tighter than expected decision that suggested further rate cuts are likely.
UK borrowing costs had earlier risen to their highest level since November, with the 10-year yield hitting as high as 4.6 per cent. They later fell back to 4.56 per cent after the BoE decision.
The moves came as investors worried about the risks to UK assets from the mounting leadership speculation surrounding Starmer.
The UK prime minister is facing fierce criticism from Labour MPs after he admitted he sent Lord Peter Mandelson to Washington in February 2025 despite knowing that the peer had continued his friendship with Jeffrey Epstein after the disgraced financier had been jailed for child sex crimes.
In an attempt to calm the row, Starmer issued an apology on Thursday, declaring in a speech in East Sussex: “I am sorry for what was done to you, sorry so many people in power failed . . . sorry for believing Mandelson’s lies and appointing him.”
Several Labour MPs and peers have broken cover to argue that the deepening row over Mandelson could spell the end of Starmer’s premiership.
Emails published by the US Department of Justice show Mandelson passed UK government documents to Epstein, from whom he had previously taken $75,000, while he was a cabinet minister.
Conservative leader Kemi Badenoch and Liberal Democrat leader Ed Davey both called for a House of Commons vote of no confidence in Starmer.
Badenoch branded Starmer’s premiership “untenable” and said that it was a question of “when, not if he goes”.
Pound on track for biggest one-day drop since November
The British pound was on track for its biggest one-day fall since November, as it sat 0.9 per cent weaker against the dollar at $1.353 and down 0.7 per cent against the euro.
The currency “has come under additional pressure from renewed political uncertainty”, analysts at MUFG said, in addition to the door looking “wide open to a rate cut” at the Bank of England’s next meeting in March.
Would a change in leadership affect economic policy?
As Keir Starmer’s position comes under increasing strain, a report by Michael Saunders, an economic adviser with consultancy Oxford Economics and former Bank of England rate setter, has explored how a change of Labour leader could affect the economy.
The report discussed a variety of outcomes: further “tax and spend” policies under an Angela Rayner premiership, increased borrowing and nationalisations under Andy Burnham, low migration under Shabana Mahmood and a closer EU relationship with Wes Streeting.
It said:
We doubt any of these alternatives would significantly lift potential economic growth in the next few years . . . Indeed, tax and spend or persistent low net migration would probably damage potential growth. But a major shift to closer EU trade links could boost potential growth in the medium term.
Whether Starmer stays as Labour leader and PM or is replaced, fiscal slippage is likely versus the existing restrictive plans as the government seeks to regain the support of voters ahead of the next general election.