Hammond welcomes sterling gains after election call

By David Milliken

By David Milliken

LONDON (Reuters) - British finance minister Philip Hammond said sharp gains in sterling on Tuesday after Prime Minister Theresa May called for a snap election showed markets wanted a stronger Conservative government to lead Brexit talks.

Sterling rose to a four-month high against the dollar in what looks set to be its biggest one-day gain in three months - though the British currency remains almost 15 percent below its level before last June's Brexit vote.

In an unusually direct response to a question about the currency, Hammond told parliament: "(The) prime minister's statement this morning has sent sterling up ... demonstrating the confidence that the markets have in the future, for this country, under a Tory government with a new mandate."

The blue-chip FTSE 100 index - which tends to be inversely correlated with the pound because of its mainly foreign-earning constituents - closed the day down almost 2.5 percent, its biggest fall since the days after the EU referendum.

May said on Tuesday she had been reluctant to ask parliament to back her move to bring forward the poll from 2020, but had decided over the past week that it was necessary to stop the opposition "jeopardising" her work on Brexit.

"The decision that the prime minister has made today is a decision made very much in the national interest to strengthen her hand as she goes into the negotiation with the European Union," Hammond told parliament.

Opinion polls show May's Conservatives have a lead of more than 20 percentage points over the opposition Labour party.

Britain has less than two years before it leaves the EU and needs to reach an agreement on future access to European markets, the destination for most of its exports, as well as set out what controls it will impose on immigration from the EU.

The International Monetary Fund said on Tuesday it was working on the assumption that Britain and the EU would reach a deal "that avoids a very large increase in economic barriers".

As part of a half-yearly update to its outlook, the IMF lifted its forecast for British economic growth this year to 2.0 percent from 1.5 percent in January, bringing it in line with the Bank of England but above many other forecasters.

IMF chief economist Maurice Obstfeld told reporters in Washington that the snap election might create greater short-run uncertainty, but could give greater clarity afterwards about what the British people wanted to achieve from Brexit talks.

Last year Britain's economy beat most private-sector economists' forecasts that it would fall into recession after June's Brexit vote, instead growing by 1.8 percent, putting it alongside Germany as the fastest-growing major advanced economy.

The IMF said the negative economic effects of the Brexit vote were materialising more slowly than it had expected. But it still expected growth to slow to 1.5 percent next year, as a weaker currency hurt consumer spending power and political uncertainty dampened private-sector investment.

"Though highly uncertain, medium-term growth prospects have also diminished ... because of the expected increase in barriers to trade and migration, as well as a potential downsizing of the financial services sector amid possible barriers to cross-border financial activity," it added.

(Additional reporting by David Lawder in Washington, editing by Andy Bruce and John Stonestreet)