LONDON (Reuters) - A Conservative victory in June 8’s election would give Britain the strongest hand in EU divorce talks and lift sterling, economists polled by Reuters said, although nearly as many felt a coalition government would secure the best Brexit deal.
Britons voted nearly a year ago to leave the European Union and Prime Minister Theresa May triggered Article 50 in March, starting a two-year countdown. After earlier saying she would not do so, May then called a snap national election to try to cement her position.
May’s Conservative party initially had a runaway lead in opinion polls but the gap with the main opposition Labour party has narrowed during the campaign. A projection by polling company YouGov this week even suggested the Conservatives could lose their overall majority in parliament, raising the prospect of political deadlock just as Brexit talks get underway.
Fourteen of 30 economists who answered a special question said a Conservative government would be best for Britain in the negotiations, while 11 favored a coalition government.
“A coalition which represents all parties might be best placed to secure a deal with the EU,” said Peter Dixon at Commerzbank. “After all, if Brexit really is the biggest challenge the UK has faced since World War Two, as some people would have it, then it maybe needs a similarly coordinated response.”
Concern about immigration from other EU member states was a major reason behind the vote to leave and May has said she will respect those fears by halting freedom of movement. But that would almost certainly mean no free access for British companies to the EU’s huge single market.
Only five respondents said a Labour victory would be the best election outcome for the Brexit talks.
“The EU27 would probably feel it had to concede less to a Labour or coalition government,” said Philip Rush at consultancy Heteronomics.
Foreign exchange strategists said a Conservative majority would drive a 1.6 percent rally in the pound while a Labour win would see it fall 3.5 percent. In the event of a coalition government it would dip 2.0 percent.
Sterling was trading at around $1.286 on Thursday and medians in the poll of 60 specialists predict it will be at $1.28 in one month, $1.27 in six and then back at $1.28 in a year. Those forecasts were a little stronger than in a May poll.
“Markets are adequately priced for a solid Tory win and the key for sterling is what happens next,” analysts at ING told clients in a note.
“The composition of the new UK Parliament could influence May’s cabinet line-up and the tone of Brexit talks. Visible steps toward a transition deal are needed to lift sterling higher.”
With little clarity still on what tone the talks will take — and several Reuters polls concluding a fractious nature would be the worst outcome for both the economy and sterling — the Bank of England is not expected to change monetary policy until 2019.
In the aftermath of the referendum the Bank cut its key interest rate to a new record low of 0.25 percent and none of the 66 economists surveyed this week predict a move at the Bank’s next meeting on June 15.
“There are two reasons why we aren’t expecting a Bank of England rate hike before Brexit talks end in 2019 –- neither of which are likely to change significantly as a result of the election,” ING analysts wrote.
“Firstly, households are feeling the squeeze from higher inflation and slower wage growth. Secondly, Brexit uncertainty is likely to persist for several years, potentially limiting investment (and) hiring.”
Those forecasts come despite inflation expected to be above the central bank’s 2 percent target throughout this year and next. It will average 2.6 percent both years and peak at 2.9 percent later this year, the poll found.
Britain’s economy slowed more sharply than first thought in early 2017 as consumers felt the hit from rising inflation, official data showed last week, losing a lot of its momentum of last year.
It expanded 0.2 percent in the first quarter and it will grow between that and 0.4 percent per quarter through to the end of next year, the poll found.
(For other economic outlook polls stories:)
(For other stories from the FX poll:)
Polling by Sarmista Sen and Shrutee Sarkar; Editing by Catherine Evans