Britain’s small and medium-sized businesses have been caught up in political turmoil again, with the Government’s long-term borrowing costs rising to their highest level in almost three decades as the City faces what could prove a bad week for Sir Keir Starmer.
The 30-year yield rose to 5.772 percent on Tuesday, a level not seen since 1998, while the 10-year benchmark jumped 0.13 percent to trade above 5.1 percent, the last place visited during the 2008 financial crisis. As bond yields and prices move in opposite directions, the sell-off reflects the depth of uneasiness among investors. For SME owners looking at their cash flow and refinancing windows, it’s a very welcome opportunity.
The start is in Thursday’s local elections, where Labor is expected to wrest more than 1,000 council seats from Nigel Farage’s Reform UK and Green Party. If the results look as bleak as predicted, Westminster watchers expect Sir Keir to face an internal challenge, possibly from the Labor left, with Manchester Mayor Andy Burnham and former Deputy Prime Minister Angela Rayner among those whose names are circling Whitehall and the Square Mile alike.
For investors, the calculation is brutally simple: any successor taken from that wing of the party is likely to loosen the purse strings further, piling more loans onto an already stretched balance sheet.
“The prospect of a leadership challenge is another source of uncertainty for businesses and households that could put them off investing and spending,” Thomas Pugh, chief economist at RSM UK, told clients in a note. “Financial markets may respond by pushing up positive yields, as any successor is likely to spend more than Starmer again. [Rachel] Reeves, raising borrowing costs across the economy. “
Analysts at Japanese investment bank Nomura warned that “the low turnout…
The implications for the UK’s 5.5 million small and medium-sized businesses are staggering. Britain’s borrowing costs are now the highest in the G7, and have risen sharply since the Gulf conflict broke out two months ago. As a major exporter of natural gas, the country is dealing with the aftershocks of war-torn inflation, and that pain is spilling over directly into the cost base of every company owned in the country, from manufacturers struggling with energy bills to high street retailers facing another squeeze on consumers’ wallets.
The pound edged higher against the dollar to $1.35 on Tuesday, but the FTSE 100 closed more than 1 percent lower as investors adjusted their exposure to UK assets across the UK.
Adding to the gloom, the Bank of England is now expected to raise interest rates later this year rather than cut them, a sharp reversal of the consensus that existed before the fighting began. Last week, Threadneedle Street warned that rates could rise to 5.25 percent if oil and gas prices remain elevated, while inflation could break 6 percent in a worst-case scenario, from 3.3 percent today. The Bank Rate was held at 3.75 percent in the latest session.
Nomura, BNP Paribas and Pantheon Macroeconomics have all cut their forecasts, now penciling in a rate hike rather than the two cuts previously expected in 2026. For SMEs offering variable credit, asset finance programs or commercial credit, that represents a logical step change in the cost of doing business.
Bond markets, which are usually busy with little interest rate expectations, have grown unusually high in Westminster. The fear is that Sir Keir will be forced to adopt an expansionary fiscal position to put his backbenchers in place, or be replaced by a more ambitious successor. Either way leads to more severe borrowing at a time when public finances are already dangerously thin: the debt-to-GDP ratio is approaching 100 percent and debt interest payments are expected to exceed £100 billion a year until at least 2031.
In another development on Tuesday, the Bank of England revealed that the extra losses in its deflationary program had grown to £125 billion, from £115 billion previously, the tab the taxpayer will pick up under a bailout deal with the Treasury.
For British business owners, the message from the gilt market is uncomfortable but unmistakable. Regardless of what Thursday brings to the ballot box, capital spending is in one direction, and discretion, in hiring, in capex, in inventory, is once again the watchword.
