UKIP victory raises concerns of another coalition government in 2015
Concerns about a potentially hung UK parliament in the next general election rose on Friday following the election of a former Conservative lawmaker as anti-EU party UKIP's second MP.
Financial analysts also warned about the implications of UKIP's rise for a British EU referendum and potential exit from the bloc, which they said could result in the City's potential market "shrivelling overnight".
With Labour and the Conservatives neck-and-neck in opinion polls, the role of UKIP following the Liberal Democrats' decline in popularity could be crucial.
Although Conservative Chief Whip Michael Gove said he was "100% sure" no further Tory MPs would defect to UKIP, there was speculation that Phillip Hollobone will be next.
The talk follows Hollobone flanking Mark Reckless as he was sworn in as Rochester and Strood's MP, alongside another Tory defector Douglas Carswell, who is now the UKIP MP for Clacton-on-Sea.
Senior UK economist Douglas French warned that "voting in the Scottish referendum, Clacton and now in Rochester signals that the three major UK parties have become individually unelectable - so from May 2015 the UK faces a further period of coalition or minority government".
In Panmure Gordon's latest broker report, they outlined that “the Scottish National Party (SNP) are projected to win over 40 seats at the next General Election and have overtaken the Liberal Democrats as the party most arithmetically suited to enter coalition with the Labour Party.
"By contrast, if the Conservatives strike a deal with UKIP – who are likely to be short on MPs but will act as a major barrier to the Conservatives achieving a majority – the terms will be a 2017 “in-out” EU referendum.”
Both possibilities are thought likely to raise uncertainty that will weigh on UK financial markets.
Berenberg Economics' chief economist Holger Schmieding aired additional concern.
"The stronger UKIP becomes, the more Eurosceptic Prime Minister Cameron becomes to fight off the anti-EU party’s threat and potential in-fighting in his party," Schmieding said.
"If the UK left [Europe] but did not retain single market access, the costs in lost trade – exports and also the lost investment in the UK – would be large, particularly if the single market in services is progressed over the coming years. The City’s potential market would shrivel overnight."
Conservatives have warned voters that a vote for UKIP could split the right-wing vote and increase Labour leader Ed Miliband’s chances of success in May.