External forecasters are more bullish, forecasting the main rate will reach 0.8 percent by the second quarter of 2017 and 1.3 percent by the same period in 2018, according to the Bank of England.
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Bank of England governor Mark Carney has previously warned Brexit represents the biggest risk to United Kingdom growth. Earlier this week, Britain’s National Institute for Economic and Social Research (NIESR) – whose former director Martin Weale sits on the BoE’s rate-setting Monetary Policy Committee said sterling could slide 20 percent if Britain left the EU.
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.
In a letter responding to governor Carney today, Chancellor George Osborne said that the Report underlined his view that the economy faced a “lose-lose situation” after a vote to Leave with costs imposed on families or companies.
The Bank of England has stepped up its warnings about the economic risks if Britain votes to leave the European Union.
“This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than in the central projections set out in the May Inflation Report”.
Carney said the uncertainty surrounding the referendum is already hurting the pound.
“Overall, we suspect that the committee will still vote 9-0 in favour of unchanged Bank Rate at this meeting”. Over the medium term, the bank still expected rates to move higher. Loretta Mester, Eric Rosengren and Esther George are all due to speak on Thursday, all of whom are voting members on the FOMC this year so their comments will be of great interest ahead of the June meeting, which the markets have now written off as being “live”.
“We have a responsibility to talk about the risks and the trade-offs that monetary policy faces so the British people can better understand the potential path of monetary policy”, he said. While growth would probably rebound in the event of a vote to remain in the European Union, the effect of existing uncertainty could persist for some time, Carney said.
Given the outlook described in the May Inflation Report projections, returning inflation to the 2% target requires achieving a balance between the drag on inflation from external factors and the support from gradual increases in domestic cost growth.
The MPC said it would “take whatever action was needed” after the referendum.
Data published by the ONS data yesterday showed that United Kingdom manufacturing output was 1.9 per cent lower year-on-year in March, the steepest decline since May 2013, albeit in line with economists’ forecasts. “In the face of greater uncertainty about the UK’s trading relationships, sterling was likely to depreciate further, perhaps sharply”, the minutes said.
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While Carney has said the BoE has a long history of not getting drawn on different political outcomes when it comes to its economic forecasts, it will find it hard not to look at at least some of the short-run impacts of leaving the EU. Last month, he said raising rates at a time when the economy is slowing “would reinforce the slowdown”.
