Along with the interest rate decision and inflation report, the Bank is expected to keep its Asset Purchase Facility at £375 billion ($542 billion). “Sterling is also likely to depreciate further, perhaps sharply”. “Whatever the outcome of the referendum, the BOE’s best contribution to promote the good of the people of the United Kingdom will be to use all its tools”. The governor said the BOE isn’t making a long-term assessment of the consequences. Over the medium term, the bank still expected rates to move higher.
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It goes on to reveal that far from this simply being a judgement on what Bank of England officials describe as the “uncertainty spike” around the fact the referendum is taking place at all – this is a judgement that Brexit would have a material effect on the economy.
“Assessing and reporting major risks does not mean becoming involved in politics; rather it would be political to suppress important judgments which relate directly to the Bank’s remits and which influence our policy actions”. The estimates were based on an assumption that Britain remains in the European Union and included an adjusted path for the pound, which stripped out roughly half of sterling’s 9 percent decline since November, on the basis it is referendum-related.
The pound surrendered initial gains following the report and was trading at $1.4438 as of 1:11pm London time, down 0.1% on the day. Against the euro, the pound strengthened to 78.46 pence, its strongest in nine days, before easing to 78.75 pence by Friday.
Publishing a swath of documents, including minutes to the latest rate-setting meeting and new quarterly forecasts, the Bank made its most forthright remarks yet on the possible impact of a leave vote. “It’s the responsibility of the Monetary Policy Committee to be independent, and he’s decided to make a deeply political choice in a referendum which is the concern of the British people, and therefore, he should be fired”, the MP told Sky News.
He added that a further scenario could include a “technical recession”, whereby an economy experiences two consecutive quarters of negative growth in gross domestic product.
Carney said there there were limits to what the BoE could do in response to 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.
Former Work and Pensions secretary Iain Duncan Smith said that Carney needed to be “very careful” about making such comments.
Last month, the bank cited a potential “softening of growth” in early 2016 and continued subdued inflation in the United Kingdom, as well as treading carefully in advance of June’s European Union referendum as key reasons for the hold.
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. That said, we have seen the BoE overlook temporary overshoots in recent years.
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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.
