Thursday, May 30

Bank Warns Brexit Could Damage UK Growth



The Bank of England has issued an unprecedented warning that the UK economy could endure “materially lower growth.. notably higher inflation” and “rises in unemployment” if Britain votes to leave the European Union next month.

The report warns of sterling falling, “perhaps sharply” – code for falls of 20% – if there is a Leave vote.

It blamed half of the existing 9% fall in the value of the pound since November on a referendum effect.

The report also indicated that the referendum itself was already hitting growth – the forecast for the current quarter slashed from 0.5% to 0.3%, the lowest growth since the 2012 Eurozone crisis.

The Bank has never before detailed the risks of a political event in this way, and this is its most extraordinary intervention in a political event since independence in 1997.

It goes much further than governor Mark Carney’s intervention in the Scottish referendum, and than what the Bank has said so far about the EU referendum. The assessment came in its regular quarterly economic checkup, the Inflation Report.

The Bank does not formally model the impact of Brexit on the economy, but it details the deliberations of a special meeting last month of its two key committees on finance and monetary policy. There were 18 members of those committees, including 8 independent experts, who signed up to a series of warnings.

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. But the Bank also lists concerns about funding the UK deficit, and corporate investment, among “amplifiers” of further financial stress.

The Bank modelled their assessment by taking out that part of the fall in sterling it calculated was due to Brexit fears.

Its central forecast is an attempt to model the future if Britain stays in, consistent with Government policy. It argues there are already signs of companies and families delaying consumption as measures of uncertainty spike up to Eurozone crisis levels.

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. The report seems to suggest a type of Brexit stagflation – lower growth and higher inflation.

In a letter responding to governor Carney today, Chancellor George Osborne said that the Report underlined his view that the economy faced a “lose-lose situation” after a vote to Leave with costs imposed on families or companies. “Either way Britain would be poorer,” he wrote.

Leave campaigners are likely to be enraged by this unprecedented intervention. The Bank privately justifies it by suggesting not assessing such as economically significant event would also be a form of intervention.