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BoE warns of Brexit consequences on growth

The BoE’s quarterly report, presenting the outlook for British growth and inflation, also highlighted the risk of a sharp drop in the pound, should Britons vote to leave the 28-nation bloc.

world Updated: May 12, 2016 21:27 IST
Bank of England on Thursday warned that uncertainty over the outcome of next month’s EU referendum was already weighing on British growth, as it left interest rates unchanged.
Bank of England on Thursday warned that uncertainty over the outcome of next month’s EU referendum was already weighing on British growth, as it left interest rates unchanged.(Reuters Photo)

Bank of England on Thursday warned that uncertainty over the outcome of next month’s EU referendum was already weighing on British growth, as it left interest rates unchanged.

“There are increasing signs that uncertainty associated with the EU referendum has begun to weigh on activity” ahead of the June 23 vote, the BoE said as it gave its latest economic projections alongside a routine monthly policy decision.

And it warned that “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’s quarterly report, presenting the outlook for British growth and inflation, also highlighted the risk of a sharp drop in the pound, should Britons vote to leave the 28-nation bloc.

The central bank, headed by Canadian national Mark Carney, forecast gross domestic product (GDP) growth of 2.0 percent this year, down from a prediction of 2.2 percent made in February.

GDP was meanwhile expected to hit 2.2 percent next year, slightly down on an earlier forecast of 2.3 percent.

“Given the economy’s recent weakness, it is no great surprise that the forecast for GDP growth this year has been cut,” said Vicky Redwood, chief UK economist at Capital Economics research group.

“Yet an assumed unwinding of Brexit effects post-referendum has not stopped the 2017 and 2018 forecasts from being cut too.”

The downgrades were made alongside the central bank’s announcement that its policymakers had voted unanimously to keep the BoE’s main interest rate at 0.50 percent, where it has stood for more than seven years.

Britain will hold a closely-watched referendum on whether or not it should stay in the EU, and opinion polls are showing that the nation is still largely undecided on the issue.

- Government warnings -

Prime Minister David Cameron warned Monday that a British exit from the EU would threaten peace on the continent, as the campaign for next month’s crucial referendum gathered steam.

Finance minister George Osborne meanwhile said Thursday that following the BoE’s updates, families in Britain “would face lower incomes because inflation would be higher, or the economy would be weaker with a hit to jobs and livelihoods”.

Michael Hewson, chief analyst at trading group CMC Markets UK, said that while Osborne’s comments were to be expected, the Bank of England “wasn’t that much more optimistic about how the economy would perform in the event of a recovery in the aftermath of a vote to remain”.

Explaining its decision to leave interest rates on hold, the BoE pointed to very low British inflation, which at 0.5 percent in March remains far below the bank’s 2.0 percent target.

At its meeting on Wednesday, the central bank voted also to maintain the amount of cash stimulus, or quantitative easing (QE), pumping around the economy at £375 billion ($542 billion, 475 billion euros).