UK's general election: no upside for GBP rates - ING

Analysts at ING note that starting with the outlook for near-term Brexit risks, the outright Tory victory amounts to a reduction in tail risks. 

• "As our UK economist has highlighted, the Withdrawal Agreement ratification is now a near-certainty. The large Tory majority means Johnson’s cabinet will not be in the thrall of Eurosceptic MPs when it comes to making decisions about a possible extension of the transition period beyond 2020, or about the future relationship with the EU.
• This we feel, was already the widespread assumption in the market before the election. Consequently, we see little room for the feel-good factor to last longer than a few days. As we have highlighted previously, the focus in the first half of next year will quickly turn to the challenge of negotiating a trade deal in a very short amount of time.
• The upcoming deadlines still justify a degree of safe-haven premium baked into Gilt yields in our view. What is interesting when compared to other markets is that Gilt investors seem to have taken a more cautious view than for example GBP FX. The 10Y Gilt-Bund spread has only reverted to its 2019 average level post-election result despite the UK stepping from the brink of a no-deal Brexit in the near-term. We think this is correct but still leaves room for a move lower in rates.
• Brexit aside, a key factor that should keep GBP rates in check is the Tory party's fiscally prudent stance, particularly compared to other parties. Despite pledges for higher spending, the Tory manifesto also promised to keep debt on a downward path. More importantly, perhaps was the conspicuous absence of grand investment plans of the sort that would stoke both a rise in borrowing and a step-change in inflation expectations. That said, with a large chunk of Johnson’s new-found majority coming from traditional Labour seats, the government may well feel the need to maintain a more expansive fiscal policy (with higher borrowing and revised fiscal rules) with half an eye on the next election in five years’ time.
• This brings us to the last element capping GBP rates: inflation. The trade-weighted Sterling strength since the summer should keep inflation expectations in check. In spite of the improvement in global risk sentiment, we see little need for long-dated Gilts to price much inflation risk.
• Despite the near-term positive of a ‘no deal’ Brexit being avoided in January, we think uncertainty surrounding the transition period will continue to keep a lid on investment during 2020. While it is still early days, this ongoing weakness will maintain pressure on the jobs market – which is already showing signs of faltering. That means the bar to Bank of England tightening, at least in the first half of 2020, is set relatively low. But barring a significant jobs market deterioration, we aren’t currently expecting rate cuts from the BoE either."