"The only coalition that could command a decisive majority in theHouse of Commons is a Lib Dem Conservative pact. This appears unlikely because the Lib Dems until now have insisted that they want an electoral reform that would keep them permanently in power as a condition for joining a government. The Conservatives would be unlikely toconcede this, though the election results do indicate that the current first past the post system leaves much to be desired. A Conservative minority government looks most likely but with the parties from Northern Ireland, Wales and Scotland holding the balance they would presumably insist on maintaining high levels of public spending in their countries as the price of supporting the government. And cebr research has already shown that spending in these regions is high in relation to GDP.
"The pound has fallen by 5 cents in the past three days; the £euro rate is being held up only by the weakness of the euro as the Greek situation unravels. If the slide continues, the MPC will almost certainly have to raise base rates to hit their inflation target.
"Financial markets are extremely nervous as a result of the rioting in Greece and the fear that the euro might break up and will not look kindly on a UK electorate that has proved surprisingly indecisive. Unless over the coming weeks it becomes clear that a UK government can be formed that will deal with the country’s economic problems, the bond market and the forexmarket will give a thumbs down to the UK.
"Another election within 18 months seems certain.
"Meanwhile, our analysis of a hung Parliament –that it would lead to higher interest rates and a weaker currency is looking prescient. The bond markets gave the UK a stay of execution until the election.With no one having won sufficient votes to form a decisive majority to deal with the country’s economic problems, these markets are now likely to react badly.
"If the Lib Dems decided to support a Conservative budget to deal with the UK’s deficit, the situation would change. But it is difficult to see why they would do this."
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