One-in-three chance of the UK economy shrinking due to Brexit: Bank of England
THE Bank of England has held interest rates at 0.75% and warned there is a one-in-three chance of the economy shrinking at the start of next year as Brexit uncertainty takes its toll.
Members of the nine-strong Monetary Policy Committee (MPC) voted unanimously to keep rates unchanged as it said heightened no-deal Brexit fears had seen uncertainty among firms become “more entrenched”, hitting the wider economy.
In its quarterly inflation report accompanying the decision, the Bank cut its growth forecast to 1.3% for both this year and next, down from the 1.5% and the 1.6% previously predicted.
In a warning shot, it also predicted a 33% chance that annual growth will be below zero in the first quarter of 2020, even without a cliff-edge EU withdrawal.
Bank governor Mark Carney said: “Profound uncertainties over the future of the global trading system and the form that Brexit will take are weighing on UK economic performance.”
He said the Bank will “take all appropriate measures” to support jobs and growth in the event of a no-deal Brexit, but stressed there were “limits” to what it could do.
Mr Carney said there would be an “instantaneous shock” on the economy from a no-deal and cautioned the pound would fall, inflation would rise and GDP would slow.
He reiterated that rates could go in either direction in a nodeal scenario and indicated the Government could not bank on a big rates cut. The Bank would need to balance the need to cool inflation caused by the plunging pound, while also providing support for a flagging economy, he added. The pound has already tumbled by 6% since the Bank’s last inflation report in May as no-deal fears mount.
UK growth is also being hit hard as businesses hold back on investment due to Brexit uncertainty, which is coming at a time of slowing global economic conditions amid trade tensions between the US and China. The Bank confirmed it now expects UK gross domestic product (GDP) to flatline in the second quarter, down from 0.5% growth between January and March.
The Bank upped its UK growth outlook to 2.1% in 2021, though it admitted its forecasts were heavily skewed by financial markets now pencilling in a rate cut to 0.5% in the first half of 2020 as they see a 50/50 chance of a nodeal Brexit.
The Bank’s forecasts are otherwise based on a smooth Brexit deal, which is increasingly looking unlikely as new Prime Minister Boris Johnson takes a hardline stance in negotiations with the EU ahead of the October 31 deadline.
In a smooth Brexit deal scenario and recovering global economy, the MPC repeated its mantra that “gradual” and “limited” rate rises would be needed.
The Bank’s inflation report added that in a smooth Brexit deal scenario, even if rates were to rise twice to 1.5% by the third quarter of 2022, it was still likely that borrowing costs would need to rise further to rein in inflation. The rates decision comes after the US Federal Reserve voted to reduce its benchmark interest rate by a quarter point late on Wednesday — America’s first cut since 2008.
Samuel Tombs, economist at Pantheon Macroeconomics, said: “The MPC is holding its nerve and not rushing to serve up more stimulus, just because markets expect it.”
James Smith, at ING, said: “With Brexit uncertainty set to intensify, we think it is very unlikely the Bank will embark on the tightening that it is still loosely signalling in its statement.
“Equally though, we think it’s too early to be pencilling in rate cuts, given the likelihood that wage growth will continue to perform solidly over coming months.”