The pound and UK government borrowing costs have showed signs of stabilising after a turbulent few days.
The pound rose early on Tuesday but then fell back to below $1.22, close to its lowest level since November 2023.
Meanwhile, a key measure of UK government borrowing costs dipped slightly but remains around its highest levels since 2008.
Chancellor Rachel Reeves faces questions in the Commons later on Tuesday with the Conservatives accusing her of not tackling the financial markets’ issues.
Borrowing costs have been rising for many countries across the world, but some have argued that decisions made in last year’s Budget appear to have made the UK more vulnerable.
On Monday, Prime Minister Sir Keir Starmer said Reeves was doing an “amazing job” but the Conservatives said she was “hanging on by her fingernails”.
The chancellor had defended her decision to travel to China at the weekend, saying the trip would improve economic ties with Beijing. However, the Conservatives said she had “fled” during a time of uncertainty in financial markets.
Governments generally borrow money by selling bonds to big investors, such as pension funds. UK government bonds are known as gilts.
The yield on the 10-year gilt – the interest rate at which the government pays back a decade-long loan to investors – dropped marginally to 4.87% on Tuesday, having risen to nearly 4.9% on Monday, its highest level for 17 years.
Meanwhile, the 30-year gilt yield edged down to 5.42% from 5.44% on Monday, its highest in 27 years.
Government debt costs in Germany, France, Spain and Italy have also been rising. Experts say investors are predicting US president-elect Donald Trump’s tariffs will increase US inflation, meaning interest rates will remain high there and elsewhere.
“It’s been a relatively dramatic couple of weeks for the gilts markets and for the pound,” Nina Skero, chief executive of the Centre for Economics and Business Research, told the BBC.
“It’s been somewhat of a worldwide phenomenon, but it seems to be particularly intense in the UK.”
She pinned the UK’s specific problems on a “delayed response to the very heavy tax and spend in the Budget”, adding that “we’re going to have to wait some months, maybe even some quarters, to see the real impact”.
Economists and retailers have said measures introduced in the Budget, such as the increase in employers’ National Insurance contributions, will spur inflation.
However, Ms Skero added the 2022 market reaction to former Prime Minister Liz Truss’ “mini” Budget was still greater in terms of “magnitude”.
“And that situation was entirely UK-focused.”
