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The costs of political uncertainty

When and by how much will the Bank of England raise interest rates? Will the government need a plan B (or C or D) to fight Covid over the winter? Will it renegotiate the Northern Ireland protocol? Will the Prime Minister even remain in office? Merely asking these questions reminds us that while political uncertainty has declined recently, it could re-emerge – a fact that matters a lot for equities and the economy.

We have a measure of policy uncertainty, an index compiled by Scott Baker, Nick Bloom and Steven Davis. It shows that uncertainty has fallen to its lowest level since 2014, thanks to reduced uncertainty about the policy response to the pandemic and about Brexit. This fall in uncertainty during the past 12 months has been accompanied by big rises in many stocks, especially in the transport and travel sectors.

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