Boris Johnson’s resignation raises new risks for markets and the economy

The UK Prime Minister’s resignation on 7 July has important implications for the future direction of policy, bond and FX markets, and the economy.

Receding risks of summer political turmoil could partially restore the supremacy of economic fundaments as the main driver of the market outlook. But markets should be cautious – and prepare for turbulence ahead. The medium-term outlook (the next year or two) remains challenged for the UK, economically and politically. The way in which any future leader responds to the cost-of-living crisis remains uncertain. Uniting the Tory party around any one leader could prove difficult.

All of this has important implications for the direction of UK policy, the outlook for the economy, and markets – here’s our quick take.


Early elections are now more likely

We believe an early election – perhaps autumn, or even the spring of 2023 – is likelier than not, and that would be negative for the pound. Not just because it raises the risk of a less market-friendly contender to gain traction; it also puts political risk back in the driving seat, where issues like another Scottish Independence referendum or a change in tac on Brexit come into play.


Raising the risk of more government spending

Early elections also raise the risk of higher (politically influenced) public spending in the near term to tackle the cost-of-living crisis and “level up” the economy. But this in turn could mean that inflation pressures shift even higher, alongside higher government borrowing to finance additional expenditure.


This could mean higher interest rates sooner than expected

If inflation does accelerate, we could see the Bank of England (BoE) spring into action sooner than expected. Our most recent forecast called for one 25 basis point (bp) interest rate hike in August this year, and two 25bp hikes in February and May next year. But we now think there’s more pressure to bring some of next year’s hikes forward, with one 25bp in August 2022, another in November 2022, and another in February 2023. At the same time, additional public spending raises the risk that the BoE delays or downsizes its quantitative tightening programme.


What does that mean for markets and businesses?

Higher interest rates sooner than later may translate into higher borrowing costs for capital markets issuers. But fixed income markets are pricing in larger interest rate hikes sooner than we expect (and in our view, at odds with BoE, which sees a soft economy ahead). A softer economy coupled with fewer interest rate hikes than the market expects could work to contain bond yields.

The pound is sensitive to anything that affects the growth outlook, so the prospect of more accommodative fiscal policy could help support the currency near term. So too is the prospect of tighter monetary policy sooner. But a drawn-out leadership contest means that strength could fade into higher volatility. An early general election would also increase the risk of another Scottish Independence referendum, which would likely add to FX market jitters.

Get in touch

Login to Agile Markets to get deeper analysis on this. Don’t have access? Get in touch with your NatWest representative or contact us here.

This article has been prepared for information purposes only, does not constitute an analysis of all potentially material issues and is subject to change at any time without prior notice. NatWest Markets does not undertake to update you of such changes.  It is indicative only and is not binding. Other than as indicated, this article has been prepared on the basis of publicly available information believed to be reliable but no representation, warranty, undertaking or assurance of any kind, express or implied, is made as to the adequacy, accuracy, completeness or reasonableness of the information contained in this article, nor does NatWest Markets accept any obligation to any recipient to update or correct any information contained herein. Views expressed herein are not intended to be and should not be viewed as advice or as a personal recommendation. The views expressed herein may not be objective or independent of the interests of the authors or other NatWest Markets trading desks, who may be active participants in the markets, investments or strategies referred to in this article. NatWest Markets will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser; nor does NatWest Markets owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on NatWest Markets for investment advice or recommendations of any sort. You should make your own independent evaluation of the relevance and adequacy of the information contained in this article and any issues that are of concern to you.

This article does not constitute an offer to buy or sell, or a solicitation of an offer to buy or sell any investment, nor does it constitute an offer to provide any products or services that are capable of acceptance to form a contract. NatWest Markets and each of its respective affiliates accepts no liability whatsoever for any direct, indirect or consequential losses (in contract, tort or otherwise) arising from the use of this material or reliance on the information contained herein. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not be lawfully disclaimed.

NatWest Markets Plc. Incorporated and registered in Scotland No. 90312 with limited liability. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and Prudential Regulation Authority. NatWest Markets N.V. is incorporated with limited liability in The Netherlands, authorised and supervised by De Nederlandsche Bank, the European Central Bank and the Autoriteit Financiële Markten. It has its seat at Amsterdam, The Netherlands, and is registered in the Commercial Register under number 33002587. Registered Office: Claude Debussylaan 94, Amsterdam, The Netherlands. NatWest Markets Plc is, in certain jurisdictions, an authorised agent of NatWest Markets N.V. and NatWest Markets N.V. is, in certain jurisdictions, an authorised agent of NatWest Markets Plc. NatWest Markets Securities Japan Limited [Kanto Financial Bureau (Kin-sho) No. 202] is authorised and regulated by the Japan Financial Services Agency. Securities business in the United States is conducted through NatWest Markets Securities Inc., a FINRA registered broker-dealer (http://www.finra.org), a SIPC member (www.sipc.org) and a wholly owned indirect subsidiary of NatWest Markets Plc.

Copyright © NatWest Markets Plc. All rights reserved.

scroll to top