UK prime minister Boris Johnson’s slim margin in last night’s confidence vote has created turmoil in the value of the pound.
Analysts and currency traders anticipate more stimulus packages as the UK leader seeks to regain popularity among his party and the country.
A vote was called on Monday evening to assess confidence in the Conservative Party leader after the threshold of 54 ministers wrote letters to the backbench chief to declare a lack of confidence in the prime minister. Johnson narrowly won the vote by 211 to 148 to retain his position as country leader.
The FTSE 100 Index bore up following the vote opening little changed this morning before tailing off slightly possibly because the next UK general election is not due to take place until 2024.
With the UK government being embroiled in months of scandal following ‘Partygate’ allegations that the PM broke his own Covid-19 rules and Sue Gray’s damning report, analysts predict many more months of “fractious” party politics.
They see a divided Conservative party going forward and have forecast the potential for new stimulus packages following a £15 billion cost-of-living crisis package that Chancellor Rishi Sunak announced would be partially funded by a windfall tax on oil and gas profits.
Although despite the new levy on British oil and gas companies, those companies that invest in UK exploration and production will benefit from tax breaks under the parallel super deduction scheme.
Such stimulus measures could further increase the Bank of England’s base rate of interest, which was raised in February to 0.5% and has since been increased to 0.75%.
Frédérique Carrier, Head of Investment Strategy in the British Isles and Asia at RBC Wealth Management, said: “The PM has survived the no-confidence vote, but the number of Conservatives MPs who voted against him is substantial enough to weaken his position further. This is unlikely to be the end of turmoil and the victory is not clear enough to draw a line under the past few months.
“We think this increases the possibility of further stimulus measures as the PM attempts to improve his popularity. Chancellor Sunak’s recent £15bn stimulus package, led expectations for the year-end Bank Rate to reach 2.3%. Any further such supportive measures would likely boost further the Bank Rate year-end expectations.”
Citi analyst Benjamin Nabarro predicted that scope for a major fiscal shift following the confidence vote was “somewhat limited”. Nabarro anticipated the Conservative Party being more “fractious” regardless of any change in leadership.
“Perhaps a more plausible scenario, is if Johnson were to survive a leadership challenge, but with a significant number of his MPs subsequently in open rebellion,” he said. “This, we think, could complicate the provision of further support, providing a marginally dovish impetus.”