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Brexit could lead to recession, says Bank of England Brexit could lead to recession, says Bank of England
(about 4 hours later)
A vote to leave the EU risks tipping the UK into recession, sending the pound sharply lower, stoking inflation, raising unemployment and denting economic growth, the Bank of England warned. The Bank of England has warned for the first time that Britain could slide into recession in the aftermath of a vote to leave the EU in next month’s referendum.
Describing the 23 June referendum on EU membership as “the most immediate and significant risk” for the UK’s economic outlook, the Bank of England said it would face a difficult balancing act in deciding whether to cut, hold or raise interest rates in the aftermath of a vote to leave the bloc. Governor Mark Carney also warned Brexit could knock the pound sharply lower, stoke inflation and raise unemployment. That would leave the Bank with a difficult balancing act as it decides whether to cut, hold or raise interest rates to counter opposing forces, Carney added.
Its governor, Mark Carney, said there were a range of possible scenarios for the economy in the event of Brexit and these “could possibly include a technical recession”. He said there were a range of possible scenarios for the economy in the event of Brexit and these “could possibly include a technical recession” – defined as two consecutive quarters of shrinking GDP.
He also warned of the risk of a spillover to the international markets from the uncertainty around the vote, saying that almost everyone he met wanted to talk about Brexit. “A vote to leave the EU could have material economic effects – on the exchange rate, on demand and on the economy’s supply potential – that could affect the appropriate setting of monetary policy,” Carney told a news conference.
He was speaking as the Bank released its latest forecasts for the economy showing a softer outlook for growth and as it announced a decision to hold interest rates at their record low of 0.5%. With the 23 June referendum clouding the economic outlook, all nine of the Bank’s interest rate setting committee agreed borrowing costs should be left on hold.
Against the backdrop of tight opinion polls, the Bank described the referendum on EU membership as “the most immediate and significant risk” for the UK’s economic outlook.
Minutes from the committee’s meeting showed it discussed the implications of both a vote to remain in the EU – seen as the more likely outcome based on current polls – and a vote to leave. It was the Bank’s most detailed assessment yet of potential Brexit effects.
The Bank warned a vote to leave the EU could:
Howard Archer, an economist at IHS Global Insight, said: “The implication is that UK recession would be a very real risk.”
Carney also warned of the risk of a spillover to international markets from the uncertainty around the vote, saying almost everyone he met wanted to talk about Brexit.
“This issue is the No 1 issue that is raised with me and my colleagues every time we meet another central banker, finance minister, the head of a major corporation, and most small business owners.”“This issue is the No 1 issue that is raised with me and my colleagues every time we meet another central banker, finance minister, the head of a major corporation, and most small business owners.”
Updating financial markets against the backdrop of tight opinion polls, the Bank’s policymakers warned that in the event of a Brexit they would have to react to opposing forces of lower growth and higher inflation because a fall in sterling would raise import prices. The governor’s remarks brought renewed criticism from campaigners for the UK to leave the EU. The former chancellor Lord Lamont accused Carney of carelessness, and said “a prudent governor would simply have said that ‘we are prepared for all eventualities’.”
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. With the referendum clouding the economic outlook and weighing on business confidence, the monetary policy committee’s (MPC) nine members all voted to leave rates at 0.5%. “The governor should be careful that he doesn’t cause a crisis. If his unwise words become self-fulfilling, the responsibility will be the governor’s and the governor’s alone,” said Lamont.
The minutes revealed the MPC discussed the implications of both a vote to remain in the EU – currently seen as the more likely outcome based on polls – and a vote to leave. “There are huge opportunities for the UK outside the EU. We are a strong economy and can stand on our own two feet like all other modern, independent countries.”
But Carney defended his intervention as legitimate and cited the Bank’s responsibility to explain any “major risk” to its forecasts.
Related: Bank of England: Brexit would mean 'lower growth and higher inflation' - liveRelated: Bank of England: Brexit would mean 'lower growth and higher inflation' - live
“A vote to leave the European Union could materially affect the outlook for output and inflation. In the face of greater uncertainty about the UK’s trading relationships, sterling was likely to depreciate further, perhaps sharply,” the minutes said.
“In addition, households could defer consumption and firms could delay investment decisions, lowering labour demand and increasing unemployment.”
The Bank noted the pound had already depreciated 9% since a November peak and that half of that was down to the “risks associated with a vote to leave the European Union”.The Bank noted the pound had already depreciated 9% since a November peak and that half of that was down to the “risks associated with a vote to leave the European Union”.
The minutes echoed remarks made by the chancellor, George Osborne, that the Bank would face a trade-off when setting policy after a leave vote. Speaking to MPs on Wednesday, Osborne also conceded for the first time that the Treasury and the Bank of England were carrying out detailed contingency planning to prevent a leave vote unleashing a financial crisis. Carney further expounded the risks of a leave vote in a letter to George Osborne, one of the leading figures in the campaign to remain in the EU. The letter was the latest in a series, regularly sent to explain why inflation was still far below the Bank’s government-set target of 2%, but this time it contained a lengthy section about the referendum.
The Bank minutes said that taken together, the combination of movements in demand, supply and the exchange rate “could lead to a materially lower path for growth and a notably higher path for inflation”. The chancellor seized on Carney’s remarks as showing “Britain would be poorer” in the event of Brexit.
“In those circumstances, the MPC would face a trade-off between stabilising inflation on the one hand and output and employment on the other. The implications for the direction of monetary policy would depend on the relative magnitudes of the demand, supply and exchange rate effects.” On the Bank’s predicted trade-off, Osborne said any outcome would “impose costs on families”, adding: “This is the kind of lose-lose situation that a vote to leave the EU creates.”
Carney further expounded the risks of a leave vote in a letter to Osborne, one of the leading figures in the campaign to remain in the EU. The letter was the latest in a series, regularly sent to explain why inflation was still far below the Bank’s government-set target of 2%. Leaving EU would stoke inflation & hit growth, leaving MPC with no-win choice on interest rates. UK would be poorer https://t.co/pfg1rBArlw
Carney has already come under criticism from some Brexit campaigners, who feel his comments on the referendum go beyond the governor’s remit. He is likely to face fresh disapproval for the letter to Osborne. However, Carney and his colleagues on the monetary policy committee were careful to note that there were factors weighing on the UK economy beyond next month’s referendum. Those included the state of households’ finances against the backdrop of further government cuts, the outlook for the UK’s relatively weak productivity performance, and the prospects for the global economy.
Carney wrote: “A vote to leave the EU could have material economic effects – on the exchange rate, on demand and on the economy’s supply potential.” The Bank also warned against expecting a rapid rebound in economic activity in the event of a vote to stay in the EU given some business projects that had been deferred before the vote could take time to restart.
Osborne seized on Carney’s remarks in his reply, summarising that the Bank’s assessment showed “Britain would be poorer” in the event of a Brexit. The inflation report’s forecasts were made on the basis the UK remains in the EU, keeping to the usual practice used before general elections of assuming the status quo prevails.
“As you point out in your letter, the EU referendum is already having an effect, and that uncertainty is beginning to weigh on economic activity,” Osborne wrote. The Bank’s view of the global economy had changed little since the last report in February. But it cut the outlook for the domestic economy to GDP growth of 2% this year, down from 2.2% pencilled in back in February.
On the Bank’s predicted trade-off, the chancellor said any outcome would “impose costs on families”, adding: “This the kind of lose-lose situation that a vote to leave the EU creates.” David Cameron also capitalised on the Bank’s Brexit warnings. He tweeted:
However, Carney and the Bank’s latest outlook was careful to note that there were factors weighing on the UK economy beyond next month’s referendum. Those included the state of households’ finances against the backdrop of further government cuts, the outlook for the UK’s relatively weak productivity performance and the prospects for the global economy. The Bank of England is right to warn leaving the EU could cause lower growth and unemployment to rise - that would hurt working people.
The Bank also warned against expecting a rapid rebound in economic activity in the event of a vote to stay in the EU. “It was possible that there would be a more prolonged drag on business spending if delayed projects took time to be restarted,” the minutes said. There was more support for the remain campaign from the White House, where the chairman of the council of economic advisers said a vote to leave the EU would hurt Britain and Europe as well as the global economy.
The inflation report’s set of forecasts showed that the Bank’s view of the global economy had changed little since the last report in February. But it cut the outlook for the domestic economy to GDP growth of 2% this year, down from 2.2% pencilled in back in February. Jason Furman told Germany’s Handelsblatt newspaper: “You can certainly argue about whether the damage a Brexit would cause would be small, medium or big but it would definitely cause damage, especially for the Brits but also for the Europeans and the global economy.”
He added: “We don’t need more uncertainty at the moment.”