Brexit is biggest risk to UK economy, warns BoE | 2016-05-13

Brexit is biggest risk to UK economy, warns BoE

13 May, 2016 12:00 AM printer

LONDON: A vote to leave the EU risks sending the pound sharply lower, stoking inflation, raising unemployment and denting economic growth, the Bank of England warned as its policymakers voted unanimously to keep interest rates at their record low.
Describing the 23 June referendum on EU membership as “the most immediate and significant risk” for the UK’s economic outlook, the central bank said it would face a difficult balancing act in deciding whether to cut, hold or raise interest rates in the aftermath of a vote to leave the bloc, reports the Guardian.
Updating financial markets against the backdrop of tight opinion polls, the Bank’s policymakers warned that in the event of a “Brexit” they would have to react to opposing forces of lower growth and higher inflation because a fall in sterling would raise import prices.
Publishing a swath of documents, including minutes to the latest rate-setting meeting and new quarterly forecasts, the Bank made its most forthright remarks yet on the possible impact of a leave vote. With the referendum clouding the economic outlook and weighing on business confidence, the monetary policy committee’s (MPC) nine members all voted to leave rates at 0.5%.
The minutes revealed the MPC discussed the implications of both a vote to remain in the EU – currently seen as the more likely outcome based on polls – and a vote to leave.
“A vote to leave the European Union could materially affect the outlook for output and inflation. In the face of greater uncertainty about the UK’s trading relationships, sterling was likely to depreciate further, perhaps sharply,” the minutes said.
“In addition, households could defer consumption and firms could delay investment decisions, lowering labour demand and increasing unemployment.”
The Bank noted the pound had already depreciated 9% since a November peak and that half of that was down to the “risks associated with a vote to leave the European Union”.
The minutes echoed remarks made by Chancellor George Osborne that the Bank would face a trade-off when setting policy after a leave vote. Speaking to MPs on Wednesday, Osborne also conceded for the first time that the Treasury and the Bank of England were carrying out detailed contingency planning to prevent a leave vote unleashing a financial crisis.


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