The Conservatives are set to have a landslide victory in the June 8 snap election that was unexpectedly announced by British Prime Minister Theresa May on Tuesday, economist Chris Scicluna at Daiwa Capital Markets Europe said Wednesday.
A big win is guaranteed for Tories as the Labour Party is in disarray, unable to form credible policy on Brexit or any other major domestic or foreign policy issue, the economist said. With the expected win, Tories has a good chance of increasing the government's working majority to more than 100 seats, he added.
"That will, of course, strengthen May's hand within Parliament and her own party, particularly against those Tories who have advocated the hardest versions of Brexit, a prospect which the FX market in particular welcomed yesterday, sending sterling to a six-month high against the dollar," Scicluna said.
A stronger sterling makes sense, according to Scicluna, who pointed out that a larger majority would allow whatever deal May eventually negotiates with the rest of the EU to be rubber-stamped by Parliament.
"So, the election should reduce the likelihood that the UK will leave the EU without any deal in place - the most damaging of all 'hard Brexit' scenarios," Scicluna said. "And with the first post-Brexit election put back two years to 2022, May's decision also arguably provides extra time to transition to the final arrangements, which might also somewhat soften the economic blow of leaving the EU."
The Daiwa economist expects that the new intake of Tory MPs would be more rabidly eurosceptic than many of the current Tories who will be retiring. Further, the xenophobic press could also favor May if it turns out that she was seeking a notably softer form of Brexit than currently appears to be the case, he said.
On the other hand, if the Scottish National Party performs well and sticks to its call for another independence referendum, it would be increasingly difficult for May to resist, Scicluna said. By calling an early election, the prime minister contradicted her earlier assertion that the Scots should not vote before the outcome of the Brexit negotiations is clear, he added.
"And with a large Tory majority in Westminster anathema to most Scots, June's election outcome should be expected to strengthen support for independence North of the Border," Scicluna said.
"So, while the election will likely reduce the probability of the hardest of hard Brexits, it will also likely increase the probability of eventual breakup of the UK."
For the Bank of England, the strengthening of sterling will give policymakers increased confidence that the current rise in inflation will be temporary, Scicluna said. They will also continue to judge that the risks to growth from Brexit remain skewed to the downside, he added.
Hence, the call for a snap poll in June does nothing to change the view that Bank Rate will be left on hold throughout this year and probably throughout 2018 too, the economist said.
by RTT Staff Writer
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