United Kingdom prime minister calls for an election United Kingdom prime minister calls for an election http://www.federatedhermes.com/us/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedhermes.com/us/daf\images\insights\article\10-downing-street-small.jpg May 23 2024 May 24 2024

U.K. prime minister calls for an election

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Published May 24 2024
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U.K. Prime Minister Rishi Sunak made a surprise call on Wednesday by announcing a snap general election, with the public set to head to the polls on July 4. The timing of the decision has raised eyebrows, with the Conservatives currently lagging behind in the polls and left with just six weeks to recover lost ground. Sunak was required to call a general election before the end of January 2025, and it was widely expected he would call it sooner, but Wednesday’s announcement has nonetheless come as a surprise to many.

Orla Garvey, senior portfolio manager for fixed income at Federated Hermes Limited, points to steadily falling inflation as supportive of the incumbent party’s campaign. “If we assume that the debate over the coming weeks will centre on how the Conservative Party have delivered inflation almost back at the Bank of England’s (BoE) target, and with the economy picking up ever so slightly after the technical recession we saw late last year, this timing makes more sense. There isn’t a huge gap between the parties in terms of the impact on growth; a Labour government would likely see potential growth revised up but would be subject to the same limited fiscal headroom as the Conservatives,” she says.

The prospect of a new U.K. government is unlikely to impact the politically independent BoE, explains Garvey, who suggests data will remain the most significant influence on future rate shifts. Policymakers will meet for the last time on June 20 before the public goes to polls, with all public statements since being cancelled (as is common practice during an election campaign).

In latest figures released by the Office for National Statistics on Wednesday, U.K. Consumer Price Index stood at 2.3% in April—its lowest level in almost three years but still lower than expected. The latest data has made the prospect of rate cuts less realistic for June, with the second half of the year now looking more likely.

“Following this week’s reading, the probability of a June rate cut has almost dropped to zero, while an August cut sits at 50% and September at around 80%. The budget release post-election might also impact this probability, but assuming a Labour government would start out by respecting the fiscal limits, the budget shouldn’t be a meaningful one,” Garvey says. 

“We continue to believe the BoE will begin its easing cycle later this year, the increased uncertainty around the election and budget trajectory under a potential Labour government likely puts steepening pressure on the yield curve.”

Tags International/Global . Politics . Markets/Economy . Equity . Interest Rates . Monetary Policy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Yield Curve: Graph showing the comparative yields of securities in a particular class according to maturity. Securities on the long end of the yield curve have longer maturities.

Consumer Price Index (CPI): A measure of inflation at the retail level.

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