UK Watch: Mixed signals

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UK Watch: Mixed signals

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UK Watch

Mixed signals

Economics: Mixed signals 15 May 2026

Risks of a leadership challenge to the PM have increased, though a delay is looking Macro

increasingly possible. The risks of a leadership challenge have prompted questions from United Kingdom

clients on the economic and fiscal policy implications of a potential leadership change. A Sonali Punhani

challenge is likely to increase near term policy uncertainty and can lead to tighter UK Economist

financial conditions, which can weigh on growth. Policy continuity is possible in some MLI+44 (UK)20 7996 1032

scenarios while a soft-left candidate could raise market concerns on higher borrowing. sonali.punhani@bofa.com

But potential negative market reaction mean breaking fiscal rules is not a foregone Ruben Segura-Cayuela

conclusion. We think market pressures could constrain radical proposals. Having said that EuropeBofA EuropeEconomist(Madrid)

some in the soft left have suggested tweaks in the fiscal framework, which can increase +34 91 514 3053

ruben.segura-cayuela@bofa.com

risks of a rise in borrowing. At the same time, the move higher in yields along with

Agne Stengeryte, CFA

potentially weaker growth or higher inflation is likely to have already hurt the fiscal Rates Strategist

headroom. We estimate that since March, higher long-term yields and front-end MLI (UK)

+44 20 7995 3536

repricing is likely to have hit the headroom by close to £10bn from £23.6bn. agne.stengeryte@bofa.com

Mark Capleton

Rates StrategistRates: Fragile. Handle with care

MLI (UK)

Last week’s local election results increased UK political volatility, with PM Starmer +44 20 7995 6118

potentially facing a formal leadership challenge. From the rates market perspective, mark.capleton@bofa.com