The highly anticipated result and the limited expected changes to economic policy have resulted in minimal immediate market impact. Political instability and continual uncertainty were not helpful for UK asset markets. A period of political stability will therefore be welcome and viewed positively.
The market reaction has been calm, the Gilt and credit markets have been stable. The result should favour mid-caps over large-cap UK equity and sectors with more domestic exposure, housebuilders and UK banks outperformed on the day. The Pound was largely unchanged.
GROWTH AND INFLATION
- Labour’s significant majority will allow it to deliver its fiscal policy agenda which, although limited, will likely provide a very modest boost to GDP growth. The economy remains in a low growth scenario, albeit with some improvement in recent months.
- On balance, Labour’s anticipated policies could result in slightly higher price pressures down the road (boost to demand, living wage adjustment), but in the short term, inflation is trending lower and is already at target, with further disinflationary pressures in the pipeline.
Fiscal policy
- This will be the main focus for the Gilt market and the broader bond market as well. The election pledges would imply that in the short term the fiscal plans will likely remain as they are right now, i.e. borrowing will remain as expected for the next 6 months.
- The first budget (expected in the autumn) will be crucial. The new government is fully aware that unfunded fiscal spending will be viewed poorly (given the Truss experiment).
Monetary policy
- Monetary policy is of course independent, and the Bank of England has adopted a dovish tone. The election outcome is not expected to have any bearing on the BoE stance or near-term path of rates.
- Interest rates are set to fall by c. 50-75 bps this year.
