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May vote and ECB in focus

By David Morrison  |  12/12/2018 15:09
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The UK Prime Minister faces the uncertainty of a confidence vote this evening. We also look ahead to tomorrow’s European Central Bank meeting

By 9:00 pm tonight, UK Prime Minister Theresa May will find out whether she still has the confidence of her Conservative colleagues to continue as their leader. The rest of us should find out soon after. There are 315 Tory MPs in the House and it took 48 of them to write enough letters to trigger tonight’s vote. But it will take a simple majority of 158 MPs to vote against Mrs May to force her to stand down as party leader. This morning the entire Cabinet came out in support of the Prime Minister, as have many backbenchers. However, it’s worth remembering that this is a secret ballot, and as we all know there can be a big difference between what MPs say in public and what they do in private. If Mrs May wins, Tory MPs won't be able to challenge her leadership again for a year. But if she loses, there'll be a Conservative leadership contest in which Boris Johnson is the current favourite to win. At lunchtime today, the bookies seemed convinced that Mrs May was set to win tonight’s vote. Paddy Power were offering 1-to-4 for her victory and 11-to-4 that she will lose.

Margin of victory

Tim Shipman, Political Editor of the Sunday Times tweeted that: “The Tory payroll vote is about 130. That leaves 185 backbenchers. If you’re looking for meaningful benchmarks of what constitutes serious damage, half of that total 93 would seem a reasonable benchmark”. In other words, the suggestion is that Mrs May would still be in trouble if she wins the vote but 90 or more of her colleagues fail to back her. Yet despite this, several commentators have said that a win will be a win, no matter how small the majority. In other words, Theresa May would not stand down as party leader even if she won by a single vote. Part of their argument is that at this time of potential crisis for the UK, Mrs May sees herself as in the best position to steer the country through the Brexit process, if nothing more. Perhaps supporting this view was the statement from the PM’s spokesman saying: “This vote isn’t about who leads the party into the next election”. In other words, there’s a suggestion here that she will stand down before 2022 even if she wins tonight’s confidence vote. If so, that may help rally some doubting MPs round to her side, if they feel that she won’t be leading the party into the next election. That would leave a relatively small group of perhaps 60 MPs who could vote against her and that wouldn’t be enough to unseat her. This certainly appears to be the market view as sterling rallied by over 1% this morning against the US dollar.

Softer Brexit?

One of the reasons for the recovery in the British pound is a theory that tonight’s vote will not only shore up Mrs May’s position, but demolish those MPs agitating for a harder Brexit. In fact, if she wins, Mrs May could then pivot for continued membership of the Customs Union and Single Market and so rid the need for a backstop. If this were the case, then she could garner enough support from the Opposition to get a deal through Parliament. This would please a clear majority of MPs and investors too. Sterling would soar. It would also be viewed as a huge betrayal by those who voted to leave the European Union back in 2016. But Tories wouldn’t care as it won’t be Theresa May leading them into the next election.

The ECB

Tomorrow the European Central Bank holds its last monetary policy meeting of 2018. The market anticipates that the Governing Council will keep its Main Refinancing Rate unchanged at zero, where it has been since March 2016. However, this will still be a significant meeting as the ECB is expected to announce that its Asset Purchase Programme of monthly bond purchases will finally come to an end after four years. There’s little doubt that many Governing Council members are anxious to end quantitative easing. Like the Fed there’s a worry that the Euro zone could go into a recession with the ECB having no leeway for monetary easing, at least in a conventional sense. Should recession hit, no doubt the central bank would ultimately opt for more bond purchases and negative interest rates, but the risks of such actions are unquantifiable.

Rate hikes a long way off

While Euro zone inflation has held around 2% for the past seven months (the ECB’s target is “just below 2%”) there are some fears that it may have peaked. There are also concerns about this year’s downturn in GDP growth across the single currency area. These worries may not be enough for the ECB to extend its bond purchase programme. But unless there’s a significant pick-up in growth and a steadying of inflation over the coming months, the prospect of a rate hike in 2019 will continue to diminish. Investors will be listening very carefully to Mario Draghi as he holds his press conference on Thursday afternoon.
 
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