UK markets aren’t scared of a Labour election win

In the 1992 UK election, despite Labour's lead in polls, the Conservatives secured a victory, prompting the Bank of England to capitalize on a gilt market rally by selling £1.6 billion in bonds. Fast forward to 2024, financial markets remain calm despite an upcoming election, reflecting a bleak fiscal outlook and confidence in Labour leader Keir Starmer. The Bank of England's impartiality and strategic actions underscore its continued role in stabilizing markets..Sign up for your early morning brew of the BizNews Insider to keep you up to speed with the content that matters. The newsletter will land in your inbox at 5:30am weekdays. Register here..By Mark Gilbert and Marcus Ashworth.In the April 1992 UK election, a consistent Labour lead in polls was unexpectedly overturned in the vote, with the Conservatives winning a fourth consecutive victory. In the following hours, at 2:30 a.m. and again at 8:15 a.m., the Bank of England took advantage of a surging gilt market to sell £1.6 billion ($2 billion) of new bonds; throughout the night "much more than this amount was sold from the bank's own holdings." .___STEADY_PAYWALL___.The central bank wasn't making a political statement. In the month prior to the plebiscite, two-year gilt yields had soared by a full percentage point to 10.6% as investors took fright at the prospect of a free-spending Labour administration; the authorities used the rally that erased the surge in borrowing costs "to secure funding in large quantity." Fast forward by 32 years, and there's no such market consternation at the possibility of Labour's return to government..Read more: UK house prices dive as mortgage rates creep higher ahead of elections.UK financial markets have so far given a collective shrug to last week's surprise announcement from Prime Minister Rishi Sunak of a July 4 general election. The muted reaction is a vote of confidence that a widely expected victory for Keir Starmer won't scare the investment horses in the manner his predecessors Jeremy Corbyn or Neil Kinnock might have..The market calm probably reflects a weary realization that Britain's fiscal outlook is so bleak that there's very little flexibility available to any government. Furthermore, shadow Chancellor of the Exchequer Rachel Reeves has committed herself to be bound even tighter to the Office for Budget Responsibility's verdict on sticking to specified fiscal rules..The current Conservative administration has left the economy in a parlous state, creating a poisoned chalice for Labour. Though inflation has slowed to 2.3% from a peak of 11.1%, that's down to the BOE's monetary policy strictures rather than anything the government has done. The International Monetary Fund warned last week that the Treasury needs to find £30 billion of savings to stabilize its debt burden; while the agency upgraded its forecast for UK growth this year to 0.7% from 0.5%, the 1.25% it anticipates for next year is still anemic..Increased state borrowing is the theme for the foreseeable future regardless of who's in power, with £265 billion ($340 billion) set to be raised in the financial year through April 2025. After accounting for redemptions and the fact that the Bank of England is no longer buying but selling large amounts of gilts, that's the highest-ever net burden shouldered by the gilt market. A test of the current stability in government debt may come in the week of June 10, when a syndicate of investment banks will market a new 10-year gilt. The sale could be as large as £10 billion, double the usual size for this method..Any potential indigestion will be eased by the maturity hitting the sweet spot for international investors, as well as the promise of instant liquidity, given the issue's size. But it's a lot for the market to absorb only four weeks before a major political event. .Sterling, another barometer of investor sentiment, has also remained relaxed, maintaining this year's gains against every other Group of 10 currency, and has even kept pace with the dollar. Kit Juckes, chief currency strategist at Societe Generale SA, says that although sterling is typically buffeted by major political events, he doesn't expect much volatility this time. High government spending in recent years "will hamstring fiscal policy, and that in turn increases the scope for lower rates," he wrote last week..As an ex-BOE staff member, Reeves is perceived as a safe pair of hands who understands the need to keep financial markets onside; there's little danger of a repeat of the market upheavals triggered almost two years ago by the unfunded tax cuts proposed by Liz Truss and Kwasi Kwarteng. And as our Bloomberg Opinion colleague Martin Ivens noted last week, Starmer has hewed closer to the middle ground in recent years after originally running for the Labour leadership as a supporter of sweeping industry nationalizations. .One more key market event is scheduled before Britain's voters get to have their say on who should run the country. The BOE's next monetary policy decision will be announced on June 20; policymakers have voluntarily agreed to cancel all speeches and statements during the election campaign, including a delay to the twice-yearly Financial Stability Report that was due on June 27. While the futures market now anticipates no cut in interest rates after April's inflation data showed price increases in the services industry remain stubbornly high, it's a sure bet that politics will play zero role in whatever the nine independent members of the Monetary Policy Committee decide next month — echoing the impartiality shown by the bank with its nighttime fundraising exercise more than three decades ago..Read also:.Mandatory refunds in UK fuel fraud fears: Are banks right? – Paul J. DaviesUK contaminated blood probe reveals "chilling" State cover-upUK stock rally set to continue as buybacks and M&A surge.© 2024 Bloomberg L.P.

UK markets aren’t scared of a Labour election win

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