The consequences “could possibly include a technical recession”.
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Brexit campaigners believe the Canadian-born Mr Carney is part of the government’s campaign and argue the pound’s recent strength suggests markets are not overly anxious about the United Kingdom leaving the 28-member bloc.
Today’s foreign exchange markets have reacted positively to the latest Bank of England releases, sending the British pound to dollar exchange rate sharply higher.
This could have a knock-on effect on house prices, while employment could also suffer as firms put recruitment on hold, the Bank said.
The Sunday Times reports the central bank has already asked other institutions to prepare for a rate cut, ahead of setting out the economic implications of a Brexit vote in its inflation report later this week.
Members of the Monetary Policy committee said in a statement after deciding to keep interest rates on hold that a vote to leave the European Union could prompt households and firms to delay spending, lowering demand for labor and causing unemployment to rise.
None of the rate setters voted for a rate cut or rise.
Rates have been unchanged for over seven years. The Bank’s forecasts would be redundant barely a month after publication.
Since then, financial markets have pushed back their assumption on when interest rates will rise to early 2019 from late 2017, in part because they price in a risk of Britain leaving the EU.
Jeremy Cook, chief economist at the worldwide payments company, World First, said that before the meeting “some commentators were looking for as many as two members of the MPC to vote for a rate cut”.
The MPC in February previously forecast United Kingdom gross domestic product growth of 2.2% this year and 2.4% in 2017.
Would Britain be better off in or out of the EU? For 2017, they reduced the projection to 2.3% from 2.4%, while 2018 was lowered to 2.3% from 2.5%.
British households have become increasingly indebted as mortgage rates have fallen to record lows.
Commenting on the Bank of England’s Inflation Report, David Kern, BCC Chief Economist, said: “The combination of lower growth and higher unemployment forecast for the next few years confirms the more hard economic climate that the United Kingdom is likely to face in the medium term”.
The Bank estimates that roughly half of the 9.0 percent fall in sterling since its November 2015 peak could be accounted for by risks associated with a vote to leave the EU. “We are talking about the risks and trade-offs the monetary policy faces so people can anticipate how the MPC will respond”.
The Bank’s Inflation Report warned of a “perhaps sharp” slide in sterling after a Leave vote and funding problems in government and corporate bond markets, and for bank funding.
Over the medium term, the bank still expected rates to move higher. “A prudent chancellor would simply have said “we are prepared for all eventualities”. But it admitted that, in the event of a Brexit, it would face a hard “trade-off” between bringing inflation down and supporting growth.
In addition to the base rate being kept at 0.5% for the 86th consecutive month, is the news that growth in the United Kingdom has stalled and that the consumer prices index (CPI) rate of inflation rose to 0.5% in March which is still far below the 2% inflation target.
The report also indicated that the referendum itself was already hitting growth with the forecast for the current quarter slashed from 0.5% to 0.3%, the lowest growth since the 2012 eurozone crisis. Eurozone output is expected to remain flat on a monthly basis in March, following a 0.8 percent fall in February. Growth is projected to recover later this year, “but to rates that are a little below their historical average”.
However, Carney and the Bank’s latest outlook was careful to note that there were factors weighing on the United Kingdom economy beyond next month’s referendum.
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Brits will decide whether they want to remain part of the European Union in a referendum on June 23. Mr Carney appears to recognise this.
