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One Victim of Brexit Doubts: Bank of England’s Powers of Prediction Chance of No-Deal Brexit Hampers Bank of England’s Powers of Prediction
(about 3 hours later)
LONDON — The Bank of England said on Thursday that British economic data had become “volatile” as the deadline for leaving the European Union approaches, and that economic growth probably flattened in recent months. LONDON
Still, the bank decided to keep its benchmark interest rate at 0.75 percent and the British pound, which had slid just before the announcement, ticked up slightly before resuming its recent swoon. In its statement, the central bank was clear that “intensifying Brexit-related uncertainties on business investment and weaker global growth” were hurting the British economy. The Bank of England trimmed its economic growth forecast for 2019 and 2020 on Thursday, and said that British economic data had become “volatile” as the deadline for leaving the European Union approaches.
The likelihood of leaving the European Union on Oct. 31 without a plan — a no-deal Brexit — has caused distress in business circles. On Thursday the pound fell below $1.21, a level not seen in two and a half years. Still, the bank decided to keep its benchmark interest rate at 0.75 percent. The British pound, which had slid just before the midday announcement, ticked up slightly in afternoon trading. In a statement, the central bank said that “intensifying Brexit-related uncertainties on business investment and weaker global growth” were hurting the British economy.
“The level of uncertainty that is affecting businesses has continued to increase,” Mark Carney, the bank’s governor, said later in a news conference, “and it is also clear that there has been a substantial shortfall in investment as a consequence of that.”
The likelihood of leaving the European Union on Oct. 31 without a plan — a no-deal Brexit — has caused distress in business circles. Twice on Thursday, the pound fell briefly below $1.21, a level not seen in two and a half years.
The bank said the uncertainty over Brexit had made economic predictions difficult. “Increased uncertainty about the nature of E.U. withdrawal means that the economy could follow a wide range of paths over coming years,” the statement said.The bank said the uncertainty over Brexit had made economic predictions difficult. “Increased uncertainty about the nature of E.U. withdrawal means that the economy could follow a wide range of paths over coming years,” the statement said.
The bank did not rule out an increase in interest rates “at a gradual pace and limited extent” if Brexit winds up being smooth and the global economy recovers. Nonetheless, the bank is edging toward a more negative outlook not just because of the potentially corrosive effects of Brexit but because of weakening global economic activity. The bank cut its forecast for economic growth for 2019 and 2020 to just 1.3 percent, down from 1.5 percent and 1.6 percent in a report in May.
Mark Carney, the governor of the Bank of England, and his rate-setting colleagues have based their predictions on a smooth Brexit. The British economy has been a relatively strong performer with employment robust and wage growth picking up. At the same time, there are growing causes for concern. Britain, for instance, is vulnerable to weakening global growth from the effects of the Trump administration’s trade wars and other factors. The bank did not rule out an increase in interest rates “at a gradual pace and limited extent” if Brexit wound up being smooth and the global economy recovered.
The uncertainties around Brexit have increased since Boris Johnson became prime minister last week. Mr. Johnson is traveling the United Kingdom in discussions with political leaders and is making clear that a no-deal exit from the European Union is very much on the table. Some analysts said Mr. Carney and his rate-setting colleagues had based their predictions on relatively rosy scenarios. The British government’s official policy is to leave the European Union with an agreement, and the Bank of England must base its economic forecasts on current policy. Yet, the chances of a no-deal Brexit have risen since Boris Johnson became prime minister last week.
In the short term, the plummeting currency is likely to fuel inflation because Britain imports more than it exports, and those imports will cost more. “Pretty much everyone” but Bank of England policymakers “is assuming that the risks of everything but a smooth Brexit have gone up and, secondly, that the impact of such an outcome is quite negative,” said Peter Schaffrik, global macro strategist at RBC Capital Markets, an investment bank, in London.
A report on manufacturing released by IHS Markit on Thursday highlighted the economy’s vulnerability. Analysts at the research firm said that production and new orders shrank in July as “manufacturers faced the ongoing headwinds of political uncertainty, a global economic slowdown” and the use of inventories built up for the original Brexit date in March. In his comments to journalists, Mr. Carney did little to hide his concerns about Britain leaving without a deal.
But he also painted a portrait of a country that was in good shape for whatever battering might be in the offing, with employment at a 44-year low and households being prudent about taking on debt. He termed the British economy “one of the most flexible” in the world.
Mr. Johnson is traveling across Britain to have discussions with political leaders and is making clear that a no-deal exit from the European Union is very much on the table.
Mr. Carney said that how the bank would react if Britain quit the European Union without a deal, and how much it could do to bolster economic growth in that event, was difficult to predict because that type of exit would set off shock waves. In the short term, a plummeting pound is likely to fuel inflation because Britain imports more than it exports, and those imports will cost more. But he said the backwash from no deal might cut into economic activity through disruption to trade and other activity.
What direction interest rate policy would take would “not be automatic and could be in either direction,” the bank said. Its overall goal in setting interest rates is to keep inflation at 2 percent.
A report on manufacturing released by IHS Markit on Thursday highlighted the economy’s vulnerability. Analysts at the research firm said that production and new orders shrank in July as “manufacturers faced the ongoing headwinds of political uncertainty, a global economic slowdown” and the winding down of inventories built up for the original Brexit date in March.