Despite vowing to fight on, dozens of Labour MPs are openly calling for Prime Minister Keir Starmer to resign or set out a timetable for his exit. In fact, we’ve already seen the first few ministers quit, demanding his departure.
Recent local election results have meant plenty of Labour faithfuls have started to question whether Starmer is still the right man for the job. Labour lost more than 30 councils and just under 1,500 councillors.
That said, poor local election results don’t always signal the end of a government. Margaret Thatcher famously lost more than 1,000 council seats in the 1981 local elections but still went on to win a landslide general election just two years later.
But they’re also warning that a leadership contest could do more harm than good for the party, the country, and potentially the wider economy. Changing prime ministers mid-term creates uncertainty, delays policy changes and can unsettle financial markets.
So what could happen from here and what could it mean for your money?
How likely is Keir Starmer to be replaced as prime minister?
It’s the million-pound question right now and the short answer is no one knows. But the numbers are getting more difficult to ignore.
Under Labour party rules, a formal leadership challenge requires 20% of the Parliamentary Labour Party to nominate a challenger — roughly 82 MPs. With 87 MPs now publicly calling for his departure, that threshold has already been passed.
While history doesn’t always repeat itself, at times like this it can be useful going back to see what’s happened in similar situations in the past.
Boris Johnson survived a formal vote of no confidence among Conservative MPs in June 2022, but resigned just weeks later when cabinet ministers started resigning in large numbers, making the government almost impossible to run.
Theresa May won a similar confidence vote in December 2018, only to announce her resignation six months later.
If there’s anything we can learn from recent history it’s that it’s rarely the formal vote that ends a premiership. It’s the moment cabinet ministers start to turn and some think that moment has now arrived for Starmer.
What happens if Keir Starmer resigns or faces a Labour leadership challenge?
In his speech on Monday, Starmer insisted he wouldn’t walk away and told cabinet on Tuesday he has no intention of resigning. But with a suggested 87 MPs now past the threshold needed to trigger a formal challenge, the decision may not be entirely his to make.
If that number is reached, there are two paths this could take.
Scenario one — an orderly exit timetable
A large number of the MPs calling for change aren’t demanding Starmer leave immediately. They want him to set out a structured timetable, staying on as prime minister while Labour runs a leadership contest, then stepping down once a new leader is elected.
Scenario two — a formal internal leadership challenge
If the pressure keeps building and a challenger declares, we could see a full leadership contest.
A candidate would need to gather enough nominations from Labour MPs as well as backing from either 5% of the Labour Constituency Parties or three affiliated organisations and then put their name to a membership-wide vote.
The winner would become Labour leader and, in all likelihood, the new prime minister — without a general election being called.
This is a longer, messier process that could stretch over several months. From what we’ve seen from bond markets already, it’s likely markets won’t react well to this level of uncertainty.
What does UK political uncertainty mean for investors?
Political uncertainty in the UK normally hits bond markets first, and usually hardest.
What we’ve seen so far is UK government bonds, known as gilts, falling in price with their yields increasing. This happens because bond prices and yields move in opposite directions.
Not only can this impact financial markets, but it can also directly affect things like how much your mortgage rate might be.
How rising UK gilt yields can affect your money
30-year gilt yields have already reached 5.81%, hitting a new 21st-century high, while the 10-year gilt yield has hit its highest level since 2008.
When gilt yields rise, it costs the government more to borrow. That matters for two reasons.
First, higher borrowing costs mean less money available for public spending. Every extra pound spent on gilt interest payments is a pound not available for public services or investment.
Second, higher gilt yields tend to push borrowing costs up across the wider economy, including mortgages, credit cards, personal loads and business loans.
Markets are also paying close attention to who might succeed Starmer. Under certain replacements, we could see higher levels of public spending for example. This could therefore mean more borrowing, more bond issuance and potentially even higher yields. It’s not a certainty, but it’s a risk that bond investors are already pricing in.
How a weaker pound affects UK stocks and the FTSE 100
Political uncertainty also tends to weaken the pound and a falling pound can mean many things. It can make imports more expensive, keep inflation stickier and make Bank of England interest rate cuts less likely.
For investors in UK stocks, the relationship between the pound and stock market performance can be more complicated.
Lots of the UK’s largest companies earn a significant chunk of their revenue in US dollars. In fact, 75% of FTSE 100 revenue comes from outside the UK.
When the pound falls against the dollar, those overseas earnings are worth more when converted back into sterling. This is why the FTSE 100 can sometimes rise even when domestic economic news is negative. It’s far more global than you might think.
Smaller UK-focused companies tend to be a different story. Businesses that rely heavily on domestic consumers, UK-based borrowing and local supply chains are more vulnerable to a combination of a weaker pound, higher interest rates and slower economic growth.
It’s also worth remembering that a weaker pound affects UK investors more broadly, not just those holding UK stocks.
If you hold investments in overseas markets, whether that’s US, European or global ETFs, the value of those investments in pound terms rises when sterling falls. On paper that can look like a gain, but it also means that if and when the pound recovers, some of that boost can reverse.
It’s a reminder that currency movements are a quiet but meaningful factor when it comes to returns.
Should investors be worried about UK political instability?
For those who want to grow their money over the long term, the answer is no.
We’ve been here before. Political upheaval caused by changes of prime minister, budget crises, referendum results is nothing we haven’t seen before.
In the short term, it can move markets sharply. But zoom out and the picture looks different. Markets have recovered from every one of these moments so far, and often quicker than expected.
The investors who tend to come out ahead through periods like this are the ones who stay diversified and stay invested. Sometimes the best thing to do is ignore the noise and just sit on your hands.
Time in the market, as ever, matters more than timing the market.
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