Governor of the Bank of England Mark Carney delivers his monthly inflation report at the Bank of England in the City of London, Thursday, May 12, 2016.
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All nine members of the MPC voted to keep rates on hold again this month despite mounting speculation over a rate cut to boost flagging growth.
It believes inflation would ease back briefly in April, from 0.5% in March.
In response to Carney’s comments, Dr Peter Westaway, Vanguard’s chief economist, said uncertainty around the referendum outcome already appears to have dampened the spending plans of firms and households in the UK.
The bank’s outlook for inflation will also be key, with the bounceback in oil prices likely to push the consumer prices index (CPI) higher over the coming months.
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. Rates have been on hold since March 2009, when the committee first cut the Bank Rate to 0.5%.
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. However, as the Federal Reserve dithers on its next move, the Bank of England looks to be moving further and further away from any increase in interest rates.
Most economists still expect the central bank to raise interest rates early next year if Britain stays in.
It is certain that the bank has a tricky time ahead of it, but even after the Brexit referendum it will face questions over how it copes with low inflation and an uncertain economic recovery.
Mr Osborne has said that the impending European Union referendum vote on June 23 was a drag on the economy.
The latest minutes from the Bank’s Monetary Policy Committee (MPC) yesterday said that a Leave vote may cause both growth and sterling to fall and unemployment to rise.
Think tank NIESR this week released its latest monthly estimates of United Kingdom growth, which suggested that GDP grew by 0.3 per cent in the three months to April, down from its previously estimated growth of 0.4 per cent in the three months ending March.
Today finds the pound to euro spot exchange rate priced at 1.27.
‘A vote to leave the European Union could have material effects on the exchange rate, demand and supply potential, ‘ stated Carney.
“The Bank is saying that it would face a trade-off between stabilising inflation on one hand and stabilising output and employment on the other”. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources.
“With Governor Carney conceding that “monetary policy can not offset all the effects of a shock”, the spectre of weak growth and years more of low interest rates has done little to reassure Sterling watchers”.
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Officials also cited the U.K.’s record current account deficit as a potential vulnerability.”Increased perceptions that the outcome of the referendum could lead to a weaker outlook for United Kingdom national income may call in to question the ability to maintain the current large-scale of capital inflows”, the MPC said.
