The governor of the Bank of England Mark Carney gives a press conference, his first since the leave result of the European Union referendum, at the Bank of England in the City of London, Britain Thursday, June 30, 2016.
The governor of the Bank of England Mark Carney gives a press conference, his first since the leave result of the European Union referendum, at the Bank of England in the City of London, Britain Thursday, June 30…
Bank of England governor Mark Carney has bad news: The Brexit vote has so weakened the UK economy that he is predicting a period of low growth, inflation above 2%, and increased unemployment.
Alongside the Bank’s new rate cut, it revealed in its quarterly Inflation Report that it is downgrading the UK’s growth forecast for 2017 to just 0.8% from the previous estimate of 2.3%. That is the biggest single quarter-to-quarter downgrade in the Bank’s one-year forecast since it started producing the Inflation Report in 1992.
Here is the new near-term unemployment estimate: The green dots are the new projection. The magenta dots are the previous projection. Note that the green projection forecasts a small immediate rise in unemployment, even though the current level of unemployment is lower than it was in May at the previous projection.
The BoE’s statement on the interest rate cut from 0.5% to 0.25% today says: “Following the United Kingdom’s vote to leave the European Union, the exchange rate has fallen and the outlook for growth in the short to medium term has weakened markedly.
The fall in sterling is likely to push up on CPI inflation in the near term, hastening its return to the 2% target and probably causing it to rise above the target in the latter part of the MPC’s forecast period, before the exchange rate effect dissipates thereafter.
“In the real economy, although the weaker medium-term outlook for activity largely reflects a downward revision to the economy’s supply capacity, near-term weakness in demand is likely to open up a margin of spare capacity, including an eventual rise in unemployment.
Consistent with this, recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year.”
In the inflation report, the Bank added: “Had it not taken the action announced today, the MPC judges it likely that output would be lower, unemployment higher and slack greater throughout the forecast period, jeopardising a sustainable return of inflation to the target.”
The Bank also noted that UK company stocks have been crushed since the EU Referendum:
The inflation report added: “Output growth is projected to slow sharply in Q3, reflecting heightened uncertainty following the referendum. In the near term, firms are likely to take time to adjust capacity in response to a more subdued demand outlook; capacity pressures within businesses are expected to soften, while surveys of recruitment intentions suggest that prospects for labour demand growth have weakened.
As a result, average hours worked per worker are projected to fall, employment growth to slow and unemployment to rise. The margin of slack in the labour market and in the overall economy is therefore projected to widen over the next year.”