The Bank of England has issued an unprecedented warning that the United Kingdom economy could endure “materially lower growth. notably higher inflation” and “rises in unemployment” if Britain votes to leave the European Union next month. The yield on the benchmark 10-year bonds rose 3bps to 1.419 pct and the yield on 2-year bonds jumped 3bps to 0.405 pct by 1135 GMT.
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Saying that the vote could materially impact policy, the bank added it would be likely to lead to a much faster rate of tightening, which would lead a hard trade-off between undesirable outcomes.
“No downside surprises here from Carney, the dovish rhetoric is very much anticipated”.
A survey showed four fifths of major British firms have already moved to hedge against the risk of sterling falling sharply against the dollar after a vote to leave, with companies expecting an average 12 percent fall in the pound. Economists expect the central bank will begin gently raising interest rates late this year or early next year if the United Kingdom chooses to remain in the bloc.
The bank’s nine policymakers unanimously agreed to leave the key interest rate at 0.5 percent. David Owen, an economist at Jefferies, said: “The Bank is having a problem getting inflation back towards target”. Overall production was down 0.4% between January and March.
There is also a clear hint that interest rates might go up even if Brexit results in lower growth, because of the inflationary impact of a sharp sterling fall.
And he warned that the BOE’s ability to cushion the blow had its limits.
The BoE’s intervention in the European Union debate was seen as its most outspoken yet, as its quarterly inflation report and the latest minutes of the monetary policy committee (MPC) were peppered with references to referendum risks. Whatever the outcome of the referendum and its consequences, the MPC will take whatever action is needed to ensure that inflation expectations remain well anchored and inflation returns to the target over the appropriate horizon. “This combination of influences. could lead to a materially lower path for growth and notably higher path for inflation”, the BoE said in its latest economic forecasts.
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But for now, economists expect the BoE to continue to exclude the impact of an “Out” vote from the projections that underpin its decisions on interest rates. Nigeria, Libya and Venezuela have seen crude output fall 450k bpd from a year ago and further rally in oil prices to be tempered by brimming crude and product stocks, until more levels of inventory are reached, they added in a note.
