Well hung, possibly drawn, but not quartered

As expected we have our first Hung Parliament since 1974 and if every party leader was honest, each one of them would admit to being very disappointed.

While Gordon Brown did not do as badly as polls predicted a month ago it was very clear that he has not been given a mandate to govern. Liberal Democrat leader Nick Clegg admitted it was a disappointing night as many who said they would vote for the Lib Dems did not have the courage of their convictions when it counted most.

But with 23% of the vote equating to just 50 odd seats, the issues of the electoral system are glaringly obvious.

Potentially the most disappointed, however, must have been Tory leader David Cameron. This really should have been his election on the back of horrendous crises, Labour gaffes and the most unpopular unelected Prime Minister for many a year.

The fact that they did not walk in says two things. One that Cameron has failed to convince many, or at least many in his team have not come up to scratch, and second, that people do actually want change, but electoral change rather than just the traditional switch from red to blue.

So, as predicted, we find ourselves in Hung Parliament territory, but what does this mean for interest rates?

There have been plenty of scare stories about the perils of a hung parliament, spread mainly by those with political motives. There is, however, no doubt that whilst some other countries do not seem to have an issue working within a balanced parliament, the UK’s previous experience has not been exactly plain sailing.

What is absolutely clear is that the leading politicians now have a grave responsibility. If they cannot put at least some of their differences aside and resort to the Punch & Judy politics that the country has so clearly railed against then we could have issues.

On the face of it, the city reacts very quickly to news such as this and the hung parliament scenario has been expected for many weeks now, so much of the initial “costs” as far as interest rates are concerned have already been price in.

Bond yields may be a little volatile in the short-term, but this has all been expected and they should settle down quickly.

One interesting little point is that actually the Euro problems are working in the UK’s favour! For all our issues we are not Greece. The UK is traditionally stable and even with a hung Parliament those who need to invest in European bonds, who do not want to take a risk on a Euro denominated region are looking at sterling bonds. This can actually counteract our own issues and have a stabilising effect. Simplistic perhaps, but you get the point.

If a relatively stable coalition is established and work begins in earnest then there is no reason for rates to jump. In fact, a coalition that actively takes the best from each party and works for the good of the country could have a dramatically calming effect.

There are many who are however, sceptical that such a scenario can be achieved. The city hates the uncertainty that weeks of haggling would cause and this could well lead to two worrying scenarios.

Firstly, investors may continue to lose confidence in sterling which if continues too far may mean that interest rates need to be raised in order to defend Sterling. Secondly, the threat of credit rating agencies seeing no particular plan to cut our deficit quick enough could well lead to the nightmare scenario of a loss of our AAA rating, which could also lead to a rise in interest rates.

In fact any prolonged indecision could lead to a number of outcomes and until we see some of the dust settling we could well see mortgage rates start to rise, reflected initially in fixed rate pricing.

However, at the time of writing Clegg has just come out and stated that he would stick to his word and give first option to those who have won the most votes which more than hints at a Conservative / Lib Dem Pact.

There is a very big question mark over this however, as undoubtedly the Liberals have more common ground with Labour and I would be very surprised if the Conservatives sign away the political system to Proportional Representation. Although Cameron as PM, Clegg Deputy and Cable as Chancellor may appeal to many.

The funny thing is this is actually what many people I have spoken to actually wanted. Parties being forced to communicate and work together for the good of the country. Yes it may be idealistic and yes we may have another election within the next 12 months, but this election shows clearly that the public want a change from the system that has protected the status quo of 2 party politics for too long.

If Clegg does not get what he wants from the Tories, he may well revert to Labour although whether he will work with Brown looks extremely doubtful.

In summary, it does seem that there is no reason to panic, at least not yet. What consumers should bear in mind however, is that we are closer than ever to the stage when interest rates will rise, whether quickly as a consequence of uncertainty and unrest, or slowly as a natural consequence of economic progression.

Either way, I do not expect that fixed rates will be as low as they are now towards the end of this year, so many people who are concerned about rising rates, who have “won” on a variable rate for the last year or so, are now thinking of quitting whilst they are ahead and opting for the sanctuary of a fixed rate.

The next few days will of course be crucial, but the leaders of the respective parties have an opportunity to act in the interests of the country and restore faith, or continue their stubborn ways and risk the wrath of voters for many years to come.