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Sir Keir Starmer’s allies have warned Labor MPs that an attempt to topple the prime minister would wreak havoc on the economy after days of turmoil that hammered sterling and spooked investors over fears of a move to the left.
In a sign of their alarm over the threat to Starmer’s leadership over his handling of the Lord Peter Mandelson scandal, supporters of the Prime Minister invoked the risk of a Liz Truss-style increase in interest rates if he were forced out of office.
“The volatile bond market makes leadership challenges extremely costly for the country; it would be completely irresponsible,” said a close ally of Starmer, who expressed concern over the prospect of the next prime minister being decided by party membership.
“Voters for the Labor leadership have shown them to be fully capable of unpredictable and disastrous results,” the aide said. “Remember they elected Jeremy Corbyn. So sensible MPs should be very careful what they wish for.”
Starmer’s numbers of supporters are dwindling in the House of Commons, where about 81 MPs would need to support a rival candidate to trigger a leadership vote by party members and allies.
Business figures and investors also warned that the leadership turmoil could derail the recent rally since the November budget, which would be further jeopardized by a shift to the left under the new prime minister.
Andy Higginson, chairman of FTSE 100 retailer JD Sports, who signed letter supporting labor Before the election, he said that despite business dissatisfaction with the Starmer-led government’s management of the economy, the “big fear” was that the party would move to the left.
“We voted for his pro-business message and the risk is that this will be a backdoor shift to the left,” he said.
Investor concerns about future government borrowing hit an eight-year peak on Friday, amid fears the new prime minister could herald an increase in debt issuance already running at more than £300 billion a year.
The metric, the spread between 10-year and two-year government borrowing costs, reached its highest level since 2018.
“If the UK sees new leadership that decides to go down a fiscal expansionary path, the gilt market is likely to fluctuate, and perhaps sterling will too,” said Mike Riddell, bond fund manager at Fidelity International.
Many Labor MPs believe Starmer, already one of the most unpopular prime ministers on record, has been significantly damaged by his decision to appoint Mandelson as Britain’s ambassador to the US last year and the subsequent fallout from the Epstein files.
Rivals including Wes Streeting, the health secretary, Angela Rayner, the former deputy prime minister, and Ed Miliband, the energy secretary, are waiting in the wings as restive MPs debate whether to launch a bid to bring down Starmer.
“The UK economy benefits from the stability that a government with a large majority brings,” the Starmer aide said. “It would be crazy to risk it.”
Sterling suffered its worst one-day fall against the dollar since September on Thursday as concerns grew over the government’s stability, before bouncing back to $1.36 on Friday.
Some said it was fear of Starmer’s choice that was creating anxiety in currency markets.
“I think this is a classic case of the devil you know,” said Jonathan Mondillo, head of fixed income at Aberdeen Investments. “Against a backdrop of heightened geopolitical risks and an uncertain macro outlook, sometimes markets just want stability.”
Stephen Jones, chief investment officer at Aegon Asset Management, said: “A new PM will not work, we have tried that five times in the last 10 years.”
Concerns over Britain’s debt levels have helped push Britain’s borrowing costs to the highest level among G7 countries.
But gilts have risen on rising expectations of a Bank of England interest rate cut since last year’s Budget, pushing yields closer to those in other major economies.
If another Labor MP “less committed to fiscal responsibility” replaces Starmer, the BoE “will not be able to lower the bank rate as far, and investors will demand larger risk premiums for holding government debt”, said Holger Schmieding, chief economist at German bank Berenberg.
The Prime Minister’s aide said: “Labor MPs must understand that the government is not like the opposition. It is difficult. There are scandals, problems, mistakes, incidents beyond your control that dominate the media for days.
“Ultimately you are judged on actual change in five years. Swiping right for a new prime minister is not a serious way to govern.”
