Bank of England Says Brexit Uncertainty May Weaken Inflation
Underlying growth has slowed, but should remain positive: Bank of England minutes.
(Bloomberg) --
The Bank of England said that inflation may be weaker than expected if the uncertainty surrounding Britain’s departure from the European Union persists.
“Political events could lead to a further period of entrenched uncertainty,” the minutes of the interest-rate decision meeting said. “The longer those uncertainties persisted,” the more likely demand would remain below potential and “domestically generated inflationary pressures would be reduced.”
Prime Minister Boris Johnson says the U.K. will leave the European Union with or without a deal on a transition on Oct. 31, even though Parliament has legislated to force a delay if no deal is reached. The turmoil puts the BOE in limbo, with the fate of the economy hanging in the balance.
The minutes are the strongest clue yet as to how policy makers are bracing for extensions to the Brexit deadline. They reiterated that the response to no deal wouldn’t be automatic, and that if the departure goes smoothly a series of gradual and limited rate hikes would be needed over the next few years.
“Increased uncertainty about the nature of EU withdrawal meant that the economy could follow a wide range of paths over the coming years,” the minutes said. The BOE’s response to any outcome “would depend on the balance of the effects of Brexit on demand, supply and the sterling exchange rate.”
The bank’s Monetary Policy Committee, led by Governor Mark Carney, kept the benchmark interest rate unchanged at 0.75% in a 9-0 vote. All 63 economists in a Bloomberg survey correctly predicted Thursday’s decision.
The pound was little changed at $1.2472 as of 1:13 p.m. in London.
Softer Expansion
The bank said that it now expects growth in the third quarter to be 0.2%, down from 0.3% in the August forecasts. The government’s recently announced spending promises would add 0.4% to GDP over the next few years. While underlying growth has weakened, it should remain positive, the minutes said.
In a separate report Thursday, the OECD warned that a no-deal Brexit would push the U.K. into a recession, send investment and exports plunging and create damaging long-term fallout for the economy.
The BOE’s survey of regional companies wasn’t as dramatic. It showed that uncertainty is hampering productivity and that a degree of excess supply has probably opened up in the economy.
The U.K. decision to stand pat comes as the world’s biggest central banks are turning dovish. With global expansion cooling and trade tensions flaring, the Federal Reserve cut rates for a second time this year on Wednesday and the European Central Bank unveiled a sweeping stimulus package last week.
Investors expect the next BOE move to be a cut rather than a hike, though policy makers noted that the market has pared expectations since August. Traders see the first quarter-point rate reduction arriving in February 2021, compared with January 2020 last month.
To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, ;Paul Gordon at pgordon6@bloomberg.net, Brian Swint
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