BOE Says ‘Brexit’ May Hit Spending as Key Rate Kept at 0.5%

Updated on
  • Monetary Policy Committee votes unanimously for unchanged rate
  • Officials have range of views on outlook for inflation

BOE Alludes to 'Brexit' Threat in Holding Rate Steady

Bank of England officials said uncertainty stemming from Britain’s referendum on its European Union membership may hold back investment and economic growth as they kept their key interest rate at a record low.

The nine-member Monetary Policy Committee, led by Governor Mark Carney, unanimously agreed to maintain the benchmark at 0.5 percent -- where it’s been for seven years. The decision was taken against a backdrop of feeble inflation, slowing global expansion and concern that the U.K. will vote to quit the EU on June 23.

QuickTake The Brexit Debate

“There appears to be increased uncertainty surrounding the forthcoming referendum,” officials said in the minutes of their March meeting. “That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term.”

Carney has already found himself embroiled in the political battle and has been criticized by some lawmakers for what they said were biased remarks favoring the U.K. staying in the EU. Prime Minister David Cameron has cited Carney, noting the governor’s comments that leaving the EU would pose a risk to financial stability.

EU View

“It is very interesting that the BOE have decided to finally express a view on Brexit with ‘Leave’ campaigners likely to be up in arms that they have come off the fence,” said James Knightley, an economist at ING Bank NV in London. “It could be the first step into what could become a more concerted campaign to highlight the economic risks.”

The minutes showed the central bank’s broader view is similar to the one it outlined in its February Inflation Report, where it contrasted domestic strength with a darkening international outlook. That echoes the Federal Reserve, which scaled back its projection for U.S. interest-rate hikes on Wednesday, citing global factors.

Pound Rises

The pound strengthened and was up 1.4 percent to $1.4464 as of 2:40 p.m. London time. Sterling has been one of the weakest performing Group-of-10 currencies over the past month, as ‘Brexit’ jitters rattled investors.

On inflation, the MPC said members have a “range of views,” while agreeing that current monetary policy settings are appropriate for now. The meeting record signals tightening is still some way off, particularly with the EU poll looming.

Still, robust domestic consumption was likely to continue and “the committee’s best judgment was that it was more likely than not that bank rate would need to increase over the forecast period to ensure inflation returned to the target in a sustainable fashion.” Inflation, at 0.3 percent in January, has been below the central bank’s 2 percent target for two years and the BOE said in February the rate will average 0.8 percent this year.

Questions remained about the extent to which low price pressures will have an impact on wages, the minutes said. There may be “some effect” in current data and officials are “watchful” for signs that low inflation is having a more persistent effect.

During its meeting, the policy makers received a briefing on Chancellor of the Exchequer George Osborne’s annual budget that was announced on Wednesday. With Osborne not letting up on plans to eliminate the deficit, monetary policy has a “critical role to play in supporting the economy,” he said.

Alongside the budget, the Office for Budget Responsibility cut its 2016 economic growth forecast to 2 percent from 2.4 percent. The economy will grow by 2.2 percent in 2017 and 2.1 percent in 2018, also less than previously anticipated. The MPC would analyze the implications of the fiscal plan as part of its preparation of its new economic forecasts to be published in its May Inflation Report, it said.

“There remains little pressure on the MPC to raise rates soon,” said Vicky Redwood, chief U.K. economist at Capital Economics Ltd. in London. “The fact that the chancellor is steadfastly sticking to his fiscal rules -- even though that meant penciling in more austerity for further ahead in yesterday’s Budget -- means that the onus remains as much as ever on the MPC to support the recovery.”