A Conservative Party Win in the General Election
The Conservative Party’s general election win may spell certainty for Brexit but it also raises questions.
A Conservative Party win in the general election represents victories for Boris Johnson, proponents of exiting the European Union (EU), and much-maligned pollsters. The latter correctly predicted the Conservative win, giving financial markets a head start in pricing in the consequences.
Having effectively won a referendum on exit, the prime minister will do so on his terms and under his revised treaty. Important and contentious details to be filled in subsequently include bilateral trade deals to replace those covered by the EU ones, especially with the EU itself by year-end. Even with these issues obscuring the outlook, investors are likely to be more receptive to risk taking and to bid up the exchange value of the pound. Investor confidence should also be buoyed by the certainty that an assertive Labor government is not in place to reregulate all and nationalize some industries.
Expect patience from the Bank of England, in part because it already frontloaded monetary policy accommodation by easing quickly after the 2016 referendum and subsequently moving the bank rate up marginally. Officials will keep the policy rate on hold until some of the dust settles on the net effect of exit on the balance of aggregate demand and supply. As for the former, the lack of clarity about the outlook impedes investment. As for the latter, disruptions in supply chains raise costs and cut output.