The top investment bank made the warning in an updated briefing note on the possible outcomes following the General Election. Deutsche Bank adds that no matter who wins the outcome is unlikely to be positive for financial markets.
George Buckley, Deutsche Bank's chief economist, believes the most likely outcome will be a Labour-led government possibly propped up by the SNP. The latest TNS poll showed the SNP riding high on 52 per cent in Scotland while Labour trail on 28 per cent.
"The SNP could encourage Labour to move further to the left in government," says Buckley. "The result would be increased taxes (mansion tax, top rate income tax, abolition of the ‘non-domicile’ regime), less austerity and likely a slower reduction in the deficit."
A Labour-SNP partnership either on a vote by vote basis or confidence and supply could have significant consequences or interest rates:
One consequence could be higher short- and longer-term interest rates as markets reassess the UK’s willingness to accumulate sovereign debt, and the Bank of England responds to higher near-term growth thanks to stronger government spending.
But the Conservatives also pose some risk to the economy. Buckley warns a Conservative push for an EU referendum could create uncertainty in the business and financial world.