Boris Johnson resignation: What’s next for UK economy

British Prime Minister Boris Johnson on Thursday resigned after the defections plunged the Conservative Party-led government into a deeper political crisis. The decision to step down comes after one of his closest allies, Treasury Chief Nadhim Zahawi, told the prime minister to resign for the good of the country

With the scandal-ridden leader resign, the race to replace Johnson could take weeks. That would leave the world’s fifth-biggest economy at risk of further drift at a time when sterling is near two-year lows against the dollar and the Bank of England is in a dilemma about raising interest rates without damaging economic activity.

Also read: Boris Johnson resigns as British Prime Minister

The duration of Conservative Party leadership contests varies. Theresa May needed less than three weeks to win after David Cameron quit in 2016 as other contenders dropped out.

But for Johnson, it took two months to become the new leader after May announced her intention to resign in 2019.

At least half a dozen candidates are expected this time.

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Here are key questions hanging over the British economy as the political drama plays out.

Inflation:

Britain is feeling the pressure of an inflation rate running at a 40-year high of 9.1%. The Bank of England thinks it will top 11% later this year.

In April, the International Monetary Fund (IMF) said that Britain faced more persistent inflation, as well as slower growth, than any other major economy in 2023.

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Sterling’s recent fall has added to the inflation pressures since then, although the prospect of increased public spending or tax cuts to shore up the Conservative Party’s fortunes pushed up the pound a bit on Thursday.

Brexit deal:

More than six years after Britain voted to leave the European Union, London and Brussels remain at loggerheads due to Johnson’s insistence on rewriting the rules – which he agreed to in 2019 – for trade involving Northern Ireland.

Also read: From Brexit deal to Partygate, a timeline of British PM Boris Johnson’s career

The possibility of improved relations with the EU under a new prime minister has prompted some economists to pencil in stronger British exports and investment although any changes in the overall trading relationship are likely to be modest.

Bank of England

Since December, Britain’s central bank has raised interest rates five times. This is its steepest run of hikes in 25 years, and it has signalled it will keep on increasing them.

Also read: UK Prime Minister Boris Johnson agrees to step down: Reports

However, the risk of a global economic slowdown has recently reduced bets by investors on that kind of big move by the Bank of England. Uncertainty over Britain’s fiscal policy direction could provide another reason for caution.