- Vote on U.K.'s European Union membership due as soon as June
- Exit from 28-nation bloc would stymie BOE policy outlook
A U.K. vote to exit the European Union would hobble the nation’s economy and prevent the Bank of England from lifting interest rates, according to Pacific Investment Management Co.
With a referendum on Britain’s membership of the 28-member bloc due as soon as June, the potential impact is clouding the outlook and was the central concern of economists in a Bloomberg survey last month. Confidence among services firms slid to a three-year low in December.
“While our central expectation would be the U.K. votes to remain part of the EU, we are aware of the considerable uncertainty around the result,” Mike Amey, a London-based money manager at Pimco, wrote in a client note obtained by Bloomberg. Uncertainty stemming from a vote to leave “would likely reduce GDP by 1 percent to 1.5 percent in the 12 months thereafter.”
Pimco predicts the BOE will increase its benchmark rate from a record low in 2016 -- as long as inflation climbs above 1 percent -- though it says an EU exit would stymie that.
The central bank, led by Governor Mark Carney, publishes its first policy decision of 2016 at noon in London on Thursday. Officials will probably vote 8-1 to leave the key rate at 0.5 percent, according to Bloomberg surveys of economists. Risks surrounding the ‘Brexit’ vote have prompted banks including Goldman Sachs and JP Morgan to push back their forecasts for the timing of the first 25 basis-point rate increase to the fourth quarter.
Pimco’s view echoes that of former BOE policy maker Charles Goodhart, who said in a Bloomberg interview on Wednesday that the referendum “will cause a hiatus for a time in which no-one will be able to do anything” in monetary policy.