Bank Warns Again of Brexit Uncertainty

14

April 2016
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Bank Warns Again of Brexit Uncertainty

Cementing the Bank of England’s anti-Brexit position, minutes from its Monetary Policy Committee’s latest meeting contain talk of uncertainty and slowing of economic growth that they feel would follow our exit from the EU.

At the meeting, the Bank’s MPC unanimously voted once again to keep interest rates at their seven year low of 0.5% in an entirely expected move. A combination of global economic factors, low inflation in the UK and uncertainty over the outcome of the upcoming referendum on EU membership in June were cited as reasons this time.

Uncertainty regarding the referendum was, unsurprisingly, a big talking point at this meeting, with discussions focussing on the potential negative impact of future investments being seen as cause for concern, given the downward effect it could have on our economic growth.

The Bank have made it clear that they will be prepared for any outcome and will work to try and ensure economic stability and growth into the future, without predicating and policies made now on either decision come June.

There is a growing school of thought saying that, if we do leave the EU, then the measures the Bank may resort to could include a reduction of the interest rate, which would be a post-crash first. This school counts among its members some 17 of 26 economists polled by Reuters recently. It is, however, still very unlikely (and has been more or less ruled out by Mark Carney in the not-too-distant past) that interest would do negative, as we’ve seen in countries like Japan recently.

“A vote to leave could have significant implications for asset prices, in particular the exchange rate,” the minutes read.

“The MPC would have to make careful judgements about the next effects of these potential influences on demand, supply and inflation. Ultimately, monetary policy would be set in order to meet the inflation target, while also ensuring that inflation expectations remained anchored.

“Whatever the outcome of the referendum, the MPC would use its tools to achieve its inflation remit.”

The implication that the kind of tools they would need to employ and the kind of action they would need to take may come from a place of borderline desperation is emphasised when they said: “such a vote might result in an extended period of uncertainty about the economic outlook, including about the prospects for export growth. This uncertainty would be likely to push down on demand in the short term.”

According to the bank, some of the negative factors that they see as potential fallout from a vote to leave are already noticeable now. These include delayed investment and equity deals and reduced demand on lenders from large corporations.

The International Monetary Fund recently warned about the potential fallout of a Brexit, and downgraded their forecasts for UK economic growth in 2016 accordingly, from 2.2% (as forecast in January) to 1.9%.

The IMF’s chief economist, Maurice Obstfeld, said: “In the United Kingdom, the planned June referendum on European Union membership has already created uncertainty for investors; a Brexit could do severe regional and global damage by disrupting established trading relationships.”

Economic growth has been stunted lately, with the aforementioned resistance from investors being partly responsible, as well as sharp falls in the manufacturing sector and slowed growth from services.

Inflation did go up from February to March by 0.2% to reach 0.5%, its highest level since December 2014, but it is still way below the Bank’s target of 2% and is still “low by historic standards”.