Brexit Fallout Weighed by Bank of England as Rate Left at 0.5%

  • Officials will react more cautiously to data before EU vote
  • Brexit may have significant impact on pound, asset prices

The Brexit Debate: What Happens if the U.K. Leaves the EU

Bank of England officials said the U.K.’s European Union referendum may already be weighing on growth as officials assessed the potential fallout if the nation votes to leave the bloc.

In a ramping up of the language previously used, Governor Mark Carney and his fellow officials signaled they won’t rush into action as they consider the implications of a so-called Brexit for policy. They warned it could increase uncertainty, weigh on demand and on the pound and even have far-reaching consequences for the labor market and the development of the economy.

The June 23 vote is creating a challenging backdrop for policy makers, who voted unanimously to keep the benchmark interest rate at a record-low 0.5 percent on Thursday. The decision follows a warning from the International Monetary Fund this week, which said it was concerned about the “severe damage” a Brexit could inflict.

“There are some signs that uncertainty relating to the EU referendum has begun to weigh on certain areas of activity, as some decisions, including on capital expenditure and commercial property transactions, are being postponed,” the minutes said. “This might lead to some softening in growth during the first half.”

‘Tied Hands’

Carney has already signaled a slow path toward tightening and recent reports indicate a cooling in U.K. economic momentum, with the National Institute of Economic and Social Research saying last week that gross domestic product may have expanded at the weakest pace in more than three years in the first quarter.

“They know their hands are tied until after the referendum,” said Alan Clarke, an economist at Scotiabank in London. “They’ve basically said they’re going to be less sensitive to data because of the proximity to the referendum.”

The pound stayed lower against the dollar after the announcement and was trading at $1.4145 as of 3:50 p.m. London time, down 0.4 percent on the day.

Business and hiring decisions may already be being delayed pending the outcome of the vote, officials said. They also noted reports that share sales and private equity deals were being postponed and said a fall in commercial property transactions in the first quarter had been striking.

A vote to exit “might result in an extended period of uncertainty about the economic outlook, including about the prospects for export growth,” the minutes said. “This uncertainty would be likely to push down on demand in the short run.”

Rate Bets

The new commentary indicates officials are still some way off changing interest rates. While economists see an increase in the first quarter of 2017, investors are much more pessimistic and are even factoring in some chance of a cut. That view is mirrored by international caution, with the European Central Bank adding stimulus and the Federal Reserve agreeing a go-slow strategy for its tightening.

“This will be a committee that is less data-dependent than normal,” said James Rossiter, an economist at TD Securities in London. That sounds “like an MPC trying to temper expectations of a cut.”

Still, the forthcoming referendum has helped push the pound down against all its major peers this year and on a trade-weighted basis sterling has dropped more than 7 percent in 2016.

Sterling Slide

“A vote to leave could have significant implications for asset prices, in particular the exchange rate,” the minutes said. “Whatever the outcome of the referendum, the MPC would use its tools to achieve its inflation remit.”

Officials said while the recent decline in the pound should help bolster demand, they were unclear about the longevity of the impact.

While much of the new information focused on the EU referendum, the minutes also showed there was a range of views on the outlook for activity and inflation. Even as inflation ticked up to 0.5 percent in March, the rate is still well below the BOE’s 2 percent goal.

“The recovery in productivity had remained lackluster, but, alongside muted wage inflation, this implied growth in unit-wage costs that was below levels consistent with meeting the inflation target in the medium term,” the minutes said.

Still, policy makers reiterated their collective view that interest rates were more likely than not to increase over the three-year forecast period.

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