Markets mixed as coalition comes to power in Westminster

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The markets were mixed as the UK's new coalition government took shape yesterday, with shares and gilts rising on hopes of swift action on the yawning budget deficit, but sterling falling against the euro and the dollar after the Bank of England issued dovish growth and inflation forecasts.

Both the FTSE 100 and FTSE 250 index of leading shares enjoyed steady gains of around 1 and 2 per cent respectively as dealers welcomed the more certain political backdrop in Westminster. The rises came despite expectations that some private investors would rush to offload shares and second homes to beat a rise in capital gains tax, with the Conservatives and the Liberal Democrats planning on raising the tax on capital gains from non-business assets from the current flat rate of 18 per cent to close to 40 per cent.

Bill Dodwell, the head of the tax policy group at the professional services firm Deloitte, said some investors were indeed likely to sell shares in an attempt to beat the change, though he did not expect the policy to come into force midway through the current tax year. "We think that the changes won't take effect until April next year," he said, adding that he'd pencilled in the 23 June as the likely date for the emergency Budget. It is also likely that the Treasury will first consult on the meaning of business and non-business assets, he said.

On the bond markets, the yield on 10-year gilts fell to 3.84 points in the afternoon, while the premium demanded by investors to hold UK debt over German government bonds narrowed. Sterling also rose in the morning as the markets pegged their hopes on deficit reduction moves, but that changed as markets revised expectations of when the Bank was likely to raise interest rates.

The ratings agency Fitch said the new Government's plans for five-year, fixed-term parliaments augured well for action on the deficit, though it kept its cards on the future of the UK's credit rating close to its chest as analysts awaited details on spending cuts and tax rises. "A strong and credible medium-term adjustment plan will be important to underpin the UK's AAA credit rating," the agency said.