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Prime Minister Liz Truss falls, political risk premium remains

We do not yet know which of the three PM hopefuls (Boris Johnson, Rishi Sunak, Penny Mordaunt who have attracted early backing from Conservative MPs) will replace Liz Truss. Whoever is PM, we think a big fiscal tightening is on its way. This may mean that the recession will ultimately be deeper or longer than we expect and interest rates may not need to rise quite as far. But given the signs that domestic inflationary pressures remain strong, we are sticking with our forecast that interest rates will rise from 2.25% now to 5.00%.

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