In an annual report on Britain’s economy, the International Monetary Fund said the country risked falling into a spiral of weaker growth, lower house prices and diminished foreign investment if voters opt to leave the European Union.
Advertisement
The Bank of England today warned that uncertainty over the outcome of next month’s European Union referendum was already weighing on British growth, as it left interest rates unchanged. Capital inflows likely will decline in the event Britain leaves the European Union, which “could pose a major financing difficulty for the United Kingdom”, the Monetary Policy Committee said in today’s report.
The MPC went on to say that in the event of a leave vote, consumers could delay purchases leading to lower economic activity, firms could delay making investments in their businesses and unemployment could rise.
He added that he thought it “highly, highly unlikely” that the BoE would cut interest rates below zero if the economy slowed sharply, an option some of his colleagues on the BoE’s Monetary Policy Committee have said they are open to. “Inflation was forecast in February to slightly overshoot its 2 percent target in 2-3 years” time, but despite this financial markets do not price in a first rate rise until 2019. Fully offsetting that drag over the short run would, in the MPC’s judgement, involve too rapid an acceleration in domestic costs, one that would risk being excessive and would lead to undesirable volatility in output and employment.
At this morning’s meeting, the bank also made its strongest intervention in the Brexit debate yet.
While British politicians spent much of Thursday arguing over the format of upcoming television debates, Mr Carney said there were limits to the United Kingdom central bank’s ability to moderate the economic consequences of an Out vote.
There are concerns about the liquidity in the core funding markets (ie. banks) – the Bank may have to use some of its 2008 crisis tools in a challenging period.
“As such, growth would (be) weaker and inflation higher in the event of a United Kingdom exit”.
Carney added that all this would leave the Bank of England with choosing from hard options of whether to cut, hold or raise interest rates to counter opposing forces. The decision on whether to raise interest rates to restrain inflation in the event of a vote to leave or cut them to support growth would depend on the magnitude and persistence of the effects on the economy, the panel said.
Either higher inflation, which would reduce household incomes, or higher interest rates, which would “impose costs on families”.
Mr Osborne told MPs on Wednesday that the Bank and Treasury were doing a “serious amount” of contingency planning for a Brexit vote.
The MPC said it would “take whatever action was needed” after the referendum. What may bother them, however, is the idea that the BoE is about to start cutting rates and loosening policy, with its concomitant implication that the United Kingdom economy is weakening.
Advertisement
It now expects the United Kingdom economy to grow by 2pc this year, from a previous forecast of 2.2pc.
