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Sir Keir Starmer’s allies have warned Labour MPs that an attempt to topple the prime minister would wreak havoc on the economy after days of turmoil that hit sterling and rattled investors fearful of a shift to the left.
In a sign of their alarm at the threat to Starmer’s leadership over his handling of the Lord Peter Mandelson scandal, the prime minister’s supporters invoked the risk of a Liz Truss-style surge in interest rates if he was pushed out of office.
“Volatile bond markets make leadership challenges extremely costly for the country; it would be totally irresponsible,” said one close ally of Starmer, who expressed concern at the prospect of the party membership deciding the next prime minister.
“The Labour leadership electorate have shown them perfectly capable of unpredictable and disastrous outcomes,” the ally added. “Remember they elected Jeremy Corbyn. So sensible MPs should be very careful what they wish for.”
Starmer has a dwindling number of supporters in the House of Commons, where around 81 MPs would need to back a rival candidate to trigger a leadership vote by party members and affiliates.
Business figures and investors also warned that the leadership turmoil could derail a recent uptick in sentiment since November’s Budget, which would be further endangered by a turn to the left under a new prime minister.
Andy Higginson, chair of FTSE 100 retailer JD Sports, who signed a letter endorsing Labour ahead of the election, said that despite business dissatisfaction with the Starmer-led government’s stewardship of the economy, the “big fear” was that the party moves to the left.
“We voted for their pro-business message, and the risk is this would be a shift to the left through the back door,” he added.
A measure of investor concerns about future government borrowing hit an eight-year peak on Friday, amid fears that a new prime minister could herald an increase in debt issuance already running at more than £300bn a year.
The metric, the spread between 10-year and two-year government borrowing costs, rose to its highest level since 2018.
“If the UK saw new leadership that decides to go down the fiscal expansion path, then the gilt market would likely throw a wobbly, and sterling probably would too,” said Mike Riddell, a bond fund manager at Fidelity International.
Many Labour MPs believe Starmer, already one of the most unpopular prime ministers on record, has been fatally 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, health secretary, Angela Rayner, former deputy prime minister, and Ed Miliband, energy secretary, are waiting in the wings as restive MPs debate whether to launch a bid to bring Starmer down.
“The UK economy benefits from the stability that a government with a large majority brings,” the Starmer ally said. “Putting that at risk would be madness.”
Sterling suffered its worst one-day fall against the dollar since September on Thursday, as anxiety grew over the stability of the government, before bouncing back on Friday to $1.36.
Some said it was the fear of an alternative to Starmer that was feeding the anxiety in currency markets.
“I think it’s a classic case of the devil you know,” said Jonathan Mondillo, head of fixed income at Aberdeen Investments. “With a backdrop of heightened geopolitical risk, and uncertain macro landscape, sometimes markets just want stability.”
Stephen Jones, chief investment officer at Aegon Asset Management, added: “A new PM isn’t going to work, we have tried this, with five in the past 10 years.”
Concerns over Britain’s debt levels have helped to push the UK’s borrowing costs to the highest level among G7 countries.
But a rally in gilts since last year’s Budget, fuelled by growing expectations for Bank of England interest rate cuts, has pushed yields down closer to those of other big economies.
If another Labour MP “less committed to fiscal responsibility” were to replace Starmer, the BoE would “not be able to lower the bank rate as far, and investors would demand a larger risk premium for holding government debt”, said Holger Schmieding, chief economist at German bank Berenberg.
The ally of the prime minister said: “Labour MPs should recognise that government is not like opposition. It’s hard. There are scandals, problems, mistakes, events out of your control that dominate the media for days.
“Ultimately though you get judged on delivery of actual change over five years. Swipe right for a new prime minister is not a serious way of governing.”