UK Borrowing Costs Hit 18-Year High as Burnham Enters Labour Leadership Race

UK government borrowing costs reached an 18-year high and the pound fell as Labour leadership contender Andy Burnham decided to contest a by-election.

While borrowing costs rose across Europe, the increases in the UK outpaced others. Analysts attributed the sharper moves to market worries that a Burnham government would boost borrowing.

The 10-year gilt yield, which sets the interest rate on UK government 10-year loans, climbed above 5.14% on Friday, the highest level since 2008.

The pound dropped 0.3% against the dollar to about $1.337. It had plunged late Thursday following Burnham's announcement.

"This is a sign that Burnham is the least market-friendly of all the candidates, as Wes Streeting's resignation did not have the same negative effect on the pound," she said.

Long-term costs also hit a 28-year peak, with 30-year gilt yields reaching 5.82%.

Other governments saw borrowing costs rise Friday amid concerns that the Iran war would drive inflation higher through elevated energy prices.

Brent crude, the global oil benchmark, jumped above $109 a barrel Friday morning from $105.72 the previous day. It later eased to around $108.10 by 12:30 BST.

Investors see a Burnham-led government as more prone to raise Britain's already elevated public borrowing.

Burnham told the New Statesman last year that the government needed to "get beyond this thing of being in hock to the bond markets."

AJ Bell investment director Russ Mould noted that while Burnham's parliamentary victory and leadership bid were uncertain, his New Statesman remark had "helped push UK borrowing costs higher and seen the pound slump."

"A process involving Burnham also promises to be more protracted and 'noisy', thereby prolonging and exacerbating the uncertainty about the political situation in the UK," he said.

Brooks identified two main factors hitting the pound and borrowing costs: the chance of a leftward policy shift and uncertainty from the leadership chaos.

"Overall, UK politics is a mess, there are already signs that foreign buyers are ditching the gilt market. If there is a major rout in the pound and/or gilts in the coming days, prospective candidates may need to assess whether now was a wise time to make a move against the PM," she said.

Jefferies economist Mohit Kumar told Reuters: "Market's fear is that Burnham would be more left leaning, and we could see further increase in deficits."

UK stocks declined Friday, with the FTSE 100 falling 1.7%. European markets dropped by similar margins.

Greater Manchester Mayor Andy Burnham confirmed he would seek a parliamentary seat after MP Josh Simons stepped aside. "We will change Labour for the better and make it a party you can believe in again," Burnham said Thursday evening. He pledged to "make politics work properly for people."

His leadership bid faces hurdles. Burnham requires selection by Makerfield constituency Labour members as their candidate, followed by a by-election win against a potential tight race with Reform UK.