20 Feb 2015
UK rates, impact of elections – DB
FXStreet (Barcelona) - Soniya Sadeesh, Strategist at Deutsche Bank, shares the probable impact on UK rates and monetary policy from UK election outcome.
Key Quotes
“While most parties commit to deficit reduction, the details are the differentiator as the fiscal stances can be clearly ranked. A Labour majority would likely have a looser fiscal stance which should be more bearish for Gilts relative to a Conservative majority which brings a tighter stance and an EU referendum.”
“Less tightening should also make it easier for the BoE to raise rates. However, this is less straightforward given the prospect for less fiscal tightening plays off against the uncertainty over the strength of the government.”
“Additionally, timing matters - if the near term consolidation plans remain unchanged, the scope for hikes is likely backloaded.”
“The scope for looser fiscal policy should weigh more on swap spreads, as it implies higher deficit financing than currently planned. It’s notable that 30Y spreads are currently around the cheapest levels since the last election, which might suggest some of the risks are factored in; there is more room from here for the 10Y sector to underperform.”
“Arguably the significant difference between parties is the Conservative’s pledge to hold an EU referendum if it wins a majority, which brings with it the risk of Brexit. The polls suggest this is unlikely however, so the possibility might be discounted.”
“A referendum would bring considerable uncertainty in the period running up to it. Monetary policy would very likely remain on hold during the period, flattening the front end.”
“There may be a risk premium attached to sterling assets; for Gilts this would be weighed against the adverse economic impact.”
Key Quotes
“While most parties commit to deficit reduction, the details are the differentiator as the fiscal stances can be clearly ranked. A Labour majority would likely have a looser fiscal stance which should be more bearish for Gilts relative to a Conservative majority which brings a tighter stance and an EU referendum.”
“Less tightening should also make it easier for the BoE to raise rates. However, this is less straightforward given the prospect for less fiscal tightening plays off against the uncertainty over the strength of the government.”
“Additionally, timing matters - if the near term consolidation plans remain unchanged, the scope for hikes is likely backloaded.”
“The scope for looser fiscal policy should weigh more on swap spreads, as it implies higher deficit financing than currently planned. It’s notable that 30Y spreads are currently around the cheapest levels since the last election, which might suggest some of the risks are factored in; there is more room from here for the 10Y sector to underperform.”
“Arguably the significant difference between parties is the Conservative’s pledge to hold an EU referendum if it wins a majority, which brings with it the risk of Brexit. The polls suggest this is unlikely however, so the possibility might be discounted.”
“A referendum would bring considerable uncertainty in the period running up to it. Monetary policy would very likely remain on hold during the period, flattening the front end.”
“There may be a risk premium attached to sterling assets; for Gilts this would be weighed against the adverse economic impact.”