The pound was the best performing major currency after news emerged that a vote of no-confidence in prime minister Boris Johnson would take place in Westminster this evening, though some economists said the potential fall-out could prove a drag on the economy in the medium-term.
At least 15% of 359 Conservative MPs must have submitted letters to the party’s chair expressing their lack of confidence in the PM in order to trigger such a vote.
After first reports that a vote had been triggered emerged on Monday morning, the reaction from financial markets was to send sterling higher against the euro and the dollar, sterling appreciating to $1.257, from $1.250 earlier this morning, even though speculation had been building last week that the required level was near.
The timing was "slightly complicated" by some MPs asking for their letters to be post-dated until after the jubilee weekend, said party chairman Sir Graham Brady as he confirmed the no-confidence vote.
A ballot of MPs will be held between 6pm and 8pm today, with the votes counted “immediately afterwards” and an announcement “made at a time to be advised”.
Most recent bookmakers’ odds put the top five candidates to replace Johnson as Conservative leader, and therefore become the new PM, as Jeremy Hunt, Liz Truss, Tom Tugendhat, Penny Mordaunt and Ben Wallace.
Sterling’s rise reflected “hope that UK politics could be on the [brink] of pushing beyond scandal and distraction”, said Jane Foley, senior FX strategist at Rabobank.
“The Tory party did not perform well at last month’s local elections and there is speculation that two approaching by-elections could further highlight voter dissatisfaction with the government. Whether or not Johnson survives the confidence vote, GBP investors will be hoping it will clear the air and allow government to move on with the job in hand.”
If Johnson is unseated and a new Conservative leader, and therefore PM, is chosen it “could have far reaching implications for UK fiscal policy as well as foreign and trade policy”, said economist Kallum Pickering at Berenberg.
Judging by the early line-up of potential successors to Johnson, “the balance of potential outcomes would tilt towards less strained relations with the EU”.
“Even the ardent Brexiteer candidates (Mordaunt and Truss) are less of the populist variety than Johnson. This suggests that, while it is unclear whether UK-EU relations would improve a bit or a lot, the overall situation stands to be much calmer.
“Over time, less fraught and uncertain UK-EU relations may prove to be the catalyst for stronger business investment and a sustained appreciation in sterling towards fair-value against the dollar (c1.40-1.45) and the euro (1.20-1.25).”
Looking beyond the next few weeks, a snap general election during the new leader’s honeymoon phase is “not unthinkable” for later this year, Pickering said, with both Johnson and Theresa May having done the same.
Whatever the result of today’s vote, Samuel Tombs, economist at Pantheon Macroeconomics, said it “won’t have a large bearing on the near-term economic outlook” after chancellor Rishi Sunak announced a comprehensive package of measures to bolster household incomes last month.
But while an extended Conservative party leadership contest would not “starve the economy of the support it needs,” Tombs agreed that the chances of a general election occurring before the scheduled May 2024 end of this parliamentary term would rise if Johnson is booted out.
A snap election “might prompt some firms to pause capex projects and might weigh on sterling, due to the other possible governments that would come into play, including those that would lead to another Scottish independence referendum”.
“In addition, a new Conservative PM might seek to manage the public finances more cautiously than Mr. Johnson, who has pushed for higher infrastructure spending. But a successor also probably would take a more constructive attitude towards E.U. relations, supporting investment and exports, and might seriously engage with the structural reforms needed to support the economy’s trend growth rate.
“A change in leader, therefore, might have some positive medium-term consequences for the economy, though the initial rise in political instability would be modestly unhelpful in the near term,” Tombs opined.