Bank warns pound will keep sliding

Sterling could fall to its lowest level since 1985 if the UK leaves the European Union without a deal, the Bank of England has warned.

Such a scenario would result in higher inflation and lower growth. Even with a deal, the economy is not out of danger. Officials slashed forecasts and warned there is now a one-in-three chance of the economy recording no growth or even shrinking as business investment is paralysed and the US-China trade war hits exports.

This means there is a rising risk of recession this year. However, interest rates were kept on hold at 0.75 per cent because policymakers, led by Mark Carney, the bank’s governor, believe a deal combined with a recovery in the world economy should push up growth from 2021, potentially requiring higher rates to rein in prices.

‘‘The underlying pace of growth has slowed to below-potential rates as a result of weaker global demand and more entrenched uncertainty about Brexit amongst UK companies,’’ Carney said.

If a deal is struck, the bank predicts that business investment will recover and household spending will pick up ‘‘broadly in line with robust real income growth’’, he said.

Carney added: ‘‘If, as assumed, Brexit proceeds smoothly to some form of deal, market interest rates would probably rise and sterling would probably appreciate.’’

But a no-deal Brexit would leave the economy in worse shape, he said: ‘‘In the event of a no-deal, notransition Brexit, sterling would likely fall, the risk premiums on UK assets would rise, and volatility would spike higher.’’

The pound has already fallen to its lowest level since January 2017, dipping to US$1.21, down 6 per cent since May.

Another fall of that scale could put the pound below its 2016 nadir of US$1.175, pushing the currency to its lowest level against the dollar since 1985.

This would risk a surge in inflation as imports cost more to British buyers, pushing up prices for a significant period of time.

‘‘About 30 per cent of what we consume is imported, directly or indirectly,’’ said Ben Broadbent, a deputy governor. ‘‘That takes quite a while to come through, several years in fact. But there are some areas where you can notice the effects more quickly, most obviously with things sensitive to the price of oil, so petrol for example, and also food prices tend to react relatively quickly.’’

By contrast a deal could boost the pound by almost 10 per cent, cutting inflation. The forecasts, which are based on a deal and a smooth transition to a new relationship with the EU, show the economy growing by 1.3 per cent this year and next year, down sharply from earlier predictions of 1.5 per cent and 1.6 per cent respectively.

‘‘There are already signs that trade actions are having larger effects than previously anticipated on global business confidence and investment spending,’’ Carney said. ‘‘The latest indicators suggest global growth is holding steady rather than picking up as the Monetary Policy Committee had expected three months ago. The quality of that growth has also deteriorated with the growth rate of business investment in the G7 being cut almost in half since its peak in late 2017.’’

The warning was reinforced as surveys of the global manufacturing industry showed activity crumbling. Factories across Britain, the eurozone and the wider world suffered their worst month since 2012 in July, according to the purchasing managers’ index, an influential business survey compiled by IHS Markit.