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Bank warns Brexit may increase unemployment | |
(35 minutes later) | |
The Bank of England has given its starkest warning yet that a UK vote to leave the EU in the June referendum could lead to higher unemployment and lower growth. | |
Its latest Inflation Report forecasts inflation will reach 0.9% in September, as long as the UK stays in the EU. | |
The report expected that after slowing in the second quarter of the year, growth will pick up in the second half. | The report expected that after slowing in the second quarter of the year, growth will pick up in the second half. |
It came as the Bank voted unanimously to keep interest rates at 0.5%. | It came as the Bank voted unanimously to keep interest rates at 0.5%. |
The Bank said that a vote to leave "could lead to a materially lower path for growth and a notably higher path for inflation than in... the report". | |
The latest minutes of its interest rate-setting Monetary Policy Committee (MPC) added that a vote to leave the EU could cause sterling to fall "perhaps sharply" and unemployment to rise. | The latest minutes of its interest rate-setting Monetary Policy Committee (MPC) added that a vote to leave the EU could cause sterling to fall "perhaps sharply" and unemployment to rise. |
The MPC said: "Households could defer consumption and firms delay investment lowering labour demand and causing unemployment to rise." | The MPC said: "Households could defer consumption and firms delay investment lowering labour demand and causing unemployment to rise." |
It added that interest rate policy would depend "on the relative magnitudes of the demand, supply and exchange rate effects". | It added that interest rate policy would depend "on the relative magnitudes of the demand, supply and exchange rate effects". |
It said that a lower exchange rate might boost trade, but would be "unlikely to offset the drag on activity from increased uncertainty and and tighter financial conditions". | |
However, it noted that the MPC would face the difficult choice of raising rates to control inflation or lowering them to stimulate the economy. | |
Chancellor George Osborne said the UK now had a "clear and unequivocal warning" from the MPC as well as the Governor of the Bank of England about the risks of a Leave vote. | |
"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," he said. | |
"So either families would face lower incomes because inflation would be higher, or the economy would be weaker with a hit to jobs and livelihoods. This is a lose-lose situation for Britain. Either way, we'd be poorer." | |
Fading | Fading |
The Bank's Inflation Report said that uncertainty over the EU referendum was already weighing on economic activity: "There is evidence that a material proportion of the 9% fall in sterling exchange rate since its peak in November could reflect referendum effects. | |
"It is hard to judge how much of the slowdown reflects a loss of underlying momentum and so may persist and how much is likely to unwind if uncertainty recedes following the referendum. | "It is hard to judge how much of the slowdown reflects a loss of underlying momentum and so may persist and how much is likely to unwind if uncertainty recedes following the referendum. |
"Referendum effects will also make it harder to interpret economic indicators over the next few months." | "Referendum effects will also make it harder to interpret economic indicators over the next few months." |
The Report said that inflation probably fell back to 0.3% in April from 0.5% in March, reflecting the falls in oil and food prices over the last year and the strength of sterling in the same period. | |
It expected inflation to return to the target 2% level by mid-2018 as these factors faded out. |