Bank of England warns of 1 in 3 chance of Brexit recession
Keeping interest rates on hold as the risks to the economy mount, the central bank said business investment was stalling, while heightened international trade tensions and a slowdown in the global economy was also having an impact on UK growth.
The Bank’s nine-member monetary policy committee (MPC) voted unanimously to leave interest rates on hold at 0.75%.
Publishing its quarterly inflation report after a plunge in the pound and as the chance of no-deal Brexit steadily mounts, the Bank said there was a 33% probability of negative growth by the start of 2020.
Threadneedle Street penciled in zero growth for GDP in the second quarter even before Britain leaves the EU. Economic growth over the near term has become subdued “reflecting more entrenched Brexit uncertainties”, it added.
Boris Johnson’s warning that he could drag Britain out of the EU without a deal within 100 days has sent sterling tumbling to the lowest levels in more than two years.
Since his elevation to No 10, sterling has crashed below $1.22 against the US dollar and recorded the worst performance of any major currency in the world over the month of July.
“These asset prices reflect market participants’ perceptions of the likelihood and consequences of a no-deal Brexit,” the Bank said.
Despite the growing risks to the economy, the Bank said it continued to assume a smooth Brexit deal with Brussels can be reached – a position it acknowledged was increasingly inconsistent with the market reaction.
The central bank must match official government policy, and Johnson still has an ambition to strike an agreement with Brussels. However, several key Johnson allies, including Michael Gove, have indicated that no-deal has risen up the agenda as the government’s “operating assumption”.
Should Britain crash out without a deal, the Bank warned the pound could drop sharply and inflation would rise and GDP growth would slow further.
However, should the UK agree a deal, it suggested interest rates would need to rise to combat rising inflation over the next three years.
“Assuming a smooth Brexit and a recovery in global growth, a significant margin of excess demand was likely to build,” the Bank said, adding: “Were that to occur, the MPC judged that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate.”