An Angela Rayner-led government would tank the pound, a Swiss private bank has warned.
Fears of “further ‘tax and spend’ policies” if Ms Rayner became prime minister would send sterling crashing to levels not seen since the Liz Truss mini-Budget in 2022, Union Bancaire Privée (UBP) predicted.
Yields on government bond markets – the rate paid for the state to borrow – would also rise sharply if it looked like Ms Rayner were to become prime minister, the bank’s analysts added.
Speculation is mounting that Sir Keir Starmer will face a leadership challenge after next month’s local elections, in which Labour is expected to suffer heavy losses. The Prime Minister’s position is already precarious amid scandal because of his appointment of Lord Mandelson as US ambassador.
Ms Rayner, the former deputy prime minister who resigned last year in a tax scandal, is the bookies’ favourite to replace Sir Keir.
In a note to clients entitled “Mayday”, referring to the local elections next month, analysts wrote: “The prospect of a Rayner-led government is likely to raise fears of further ‘tax and spend’ policies, which could push long-end yields towards higher levels.”
The bank expects the pound to weaken against the euro as speculation of a leadership challenge mounts. One euro currently buys 87 pence but UBP expects it to buy 90p by the end of the year.
That would mark the weakest level against the single currency since September 2022 in the aftermath of Ms Truss’s mini-Budget.
Ms Rayner has sought to allay concerns about her policy platform by launching a charm offensive in the City. The Telegraph previously reported that she has appeared at a series of dinners and held calls with banks, hedge funds, consultants and money managers to sooth fears Labour will lurch to the Left.
UBP said there was “a dearth of credible candidates to replace Starmer”. It named Wes Streeting, the Health Secretary, and Andy Burnham, the Mayor of Manchester, as other potential challengers to Sir Keir.
UBP, which is owned by the de Picciotto family in Switzerland, warned that any rise in government borrowing costs would weaken the public finances.
It said a half percentage point increase in the yield on 10-year gilts, as the UK’s benchmark bonds are known, would wipe out around £15bn of the Chancellor’s Budget headroom over time.
“The prospect of significantly higher refinancing costs is not insignificant and it should not be underestimated by investors,” analysts said.
Britain’s public finances are already facing strain as a result of the inflation shock caused by the Iran war. The yields on around a quarter of gilts are linked to the rate of inflation, which rose from 3pc to 3.3pc in March as the conflict drove up fuel prices.
Geneva-based bank UBP is best known in Britain for buying the international business of Coutts, which banks the Royal family and operates a cash machine in Buckingham Palace.
Ms Rayner was contacted for comment.
