BOE Sees Rising No-Deal Brexit Worry in Tension With Markets

(Bloomberg) --

The Bank of England acknowledged rising concerns over a no deal Brexit as it kept interest rates on hold and cut its near-term economic growth forecast to zero.

While officials, led by Governor Mark Carney, said they still see the need for interest-rate hikes in coming years if their forecasts bear out, they also acknowledged that investors are taking a different view than the bank’s assumption of a smooth Brexit.

That’s left the BOE’s outlook at at odds with markets, where the possibility that the U.K. will leave the European Union without a deal has pushed the pound lower and prompted investors to start pricing in rate cuts. The Federal Reserve and others are moving toward more stimulus amid mounting global risks.

“Domestically, the perceived likelihood of no-deal Brexit has risen,” the bank said in a summary of monetary policy following its June meeting.

The BOE said that downside risks to growth have increased since May, and underlying expansion has weakened slightly in the first half. It cut its prediction for this quarter to stagnation from 0.2% growth, a forecast in line with the median estimate of economists in Bloomberg’s latest survey. The pound slid against the dollar after the minutes, while U.K. gilts rallied.

Despite the weaker outlook, the BOE is somewhat hemmed in by a forecast that assumes a form of “smooth” Brexit for the U.K., a scenario that implies the need for modest policy tightening. That assumption looks more fragile now, with all the remaining candidates in the race to succeed Prime Minister Theresa May refusing to exclude the prospect of leaving without a new arrangement in place.

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The minutes are softer than Carney’s remarks last month, when he warned that more rate hikes would be needed over the next few years to keep inflation under control and that the market curve doesn’t reflect that.

There is “ongoing tension between the MPC’s forecast conditioning assumption of a smooth Brexit and the assumptions about alternative Brexit scenarios that were priced into the financial market variables,” officials said.

The panel voted 9-0 to hold the key rate at 0.75%. All 63 economists in a Bloomberg survey correctly predicted Thursday’s decision.

While the BOE reiterated its guidance for limited and gradual rate hikes in the minutes, but also joined other major central banks in recognizing the weaker global outlook. European Central Bank President Mario Draghi this week pledged new stimulus if the outlook doesn’t improve. The Fed on Wednesday opened the door to a rate cut as soon as next month.

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