Brexit on Top of Bank of England’s Concerns

May 13, 2016

By Thy

The Bank of England has for the first time warned that Brexit could push the U.K. economy into a recession while leaving the interest rates on hold at record low of 0.5% on its Super Thursday meeting.

In its quarterly Inflation Report, the central bank emphasized on the risks that a Brexit carries including job losses, rise in prices, delay in investment and spending, a sharply falling sterling and above all, the possibility of a “technical recession.”

“The most significant risks to the bank’s forecast concern the referendum. A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy,” the BOE said in a statement. The policymakers would face challenges in finding a balancing act in the post-Brexit world and whether a leave vote would lead to a cut or rise for the interest rates still remains uncertain. The EU referendum on the U.K. membership in the EU is due on June 23.   

The bank’s governor Mark Carney said a slowdown in growth was expected and there was a chance of a rate hike despite the slowdown in case a tumble in sterling pushed the inflation higher. The sterling has depreciated 9% since its November peak mainly due to the Brexit concerns. BOE also lowered its growth forecast to only 2% for 2016 and 2.3% for 2017 and 2018.

Sentifi received great attention from the crowd after the central bank’s meeting on Thursday which focused on the warnings over Brexit.

BOE - Brexit 2

However, Mark Carney’s remarks have faced some criticism from the Brexit backers as well as other financial market participants. “The governor should be careful that he doesn’t cause a crisis. If his unwise words become self-fulfilling, the responsibility will be the governor’s and the governor’s alone,” said former chancellor Lord Lamont.

The financial crowd did not quite agree with the Bank of England’s governor on the impact of Brexit on sterling.

Despite the negativity among the crowd, we have to admit that the U.K. economy is slowing down with real signals. “The implication is that U.K. recession would be a very real risk,” said HIS Global Insight economist Howard Archer.

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