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Currently, the United Kingdom is going through its highest level of political elections, the race for prime minister. The frontrunners are the sitting PM David Cameron and the Labour Party’s Ed Miliband. Cameron, who’s long been known to favor the rock bottom interest rates that the country is currently experiencing, is the only PM in the country's history since the 1950s to hold office without even the slightest fluctuation of the interest rates. However, the anticipation of a changing political horizon brings immense speculation in both domestic and international markets.
With the past few years of stagnant interest rates comes the expectation that the UK will take after some larger world economies and have the Bank of England (BoE) ease the nation into slightly higher rate increases. Like its American counterpart, the BoE has constructed a timeline for the rate hikes, with the earliest saved for July of 2016. Britain's Bank Rate (comparable to the American Federal Funds Rate) has been flat at 0.5% since March 2009, and the path to monetary tightening for the UK will be a rather gradual one. Speculations from various financial institutions predicted rising rates much sooner - as early as 2014, in fact. Extenuating circumstances caused by plunging oil prices and inflation dropping to zero led to a dubious economic recovery plan set forth by the UK's central bank.
Given the nation's current economic situation, the results of the election could be a major crossroads for the British economy, regardless of who takes office next. With a fresh face in office comes ambitious policy, one which will most likely consist of contracting the economy through monetary policy. As is expected when a national entity reinstates new forms of old economic policy, foreign investors get uncomfortable with changing waters in the markets when there is such a low level of certainty in long term strategies and progressively higher levels of volatility.
The silver lining with Britain's economy that can't be said for the other massive economies of the Western world is, that despite this fiscal tightening, the UK's bond markets are holding up as strong as ever. However, with even a hint of domestic instability due to political factors, the British markets are in peril of facing some longer term issues in terms of foreign investment, or the lack thereof. Specifically, there has been a $360 billion withdrawal from external interests due to the possibly shaky situation following PM elections and the idea of changing economic policies. Within the first few months of 2015 alone there was another $68 billion investing outflow. The added tension of Russia-Ukraine instability and the Scottish referendum in addition to post-election trepidation contribute to a hazy horizon for UK's future.
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