The
Bank of Englandhas
issued a fresh warning that a vote to leave the EU in next week’s
referendum risks knocking economic growth, pushing the pound sharply
lower and sending shockwaves through the global economy.
Against
the backdrop of jittery financial markets, the Bank alsorevealed its
top policymakers had been briefed by staff on contingency planning for
the referendum as it readies measures to prevent markets seizing up in
the event of a leave vote next week.
Announcing its decision to keep interest rates at their record low of 0.5%,
the Bank said the referendum on 23 June was the biggest immediate risk
to UK financial markets, and perhaps those overseas, and that the
current uncertainty was already denting spending. The pound has weakened
in the run-up to the vote as opinion polls have pointed to a lead
forthe leave vote and the Bank warned in minutes to its latest rate-setting meeting that it would fall further in the event of Brexit.
“The
outcome of the referendum continued to be the largest immediate risk
facing UK financial markets, and possibly global financial markets,”
said the minutes. In addition: “On the evidence of the recent behaviour
of the foreign exchange market, it appears increasingly likely that,
were the UK to vote to leave the EUsterling’s exchange rate would fall
further, perhaps sharply.”
The minutes also noted
recent comments on potential Brexit risks to global financial markets
made by the US central bank as it left interest rates there on hold this
week. The record of the Bank’s finalm rate-setting meeting before the
referendum showed all nine members of the monetary policy committee
(MPC) voted unanimously to keep interest rates at 0.5%. That was as
expected by financial markets and economists,given the impending vote.
The
minutes said the MPC had been briefed on contingency planning for the
referendum, including on the “more intensive supervision by the
Prudential Regulation Authority of major financial institutions to
ensure they had sufficient liquidity”.
The Bank said in
the minutes that it was “well placed to address liquidity needs and
support the functioning of financial markets”. In the minutes,
policymakers noted a pick-up in uncertainty ahead of the vote, which
could knock economic growth.
“The main focus of the
committee’s policy discussion this monthconcerned the difficulty in
identifying the underlying momentum in the domestic economy, amidst the
influence on activity of uncertaintyrelated to the
EU referendum,” the minutes said.
“Measures
of uncertainty had increased further over the past month, with the UK a
clear outlier internationally. And there had been growing evidence that
uncertainty about the outcome of the referendum was leading to delays
to major economic decisions that were costly or difficult to reverse.”
There
had been a “sharp decline” in the value of commercial real estate
transactions and in merger and acquisition (M&A) activity and
reports of delayed business investment, the Bank said, echoing some
private sector reports of spending decisions being deferred. The Bank
also noted some possible influence oconsumer spending.
Regarding
households, both car purchases and residential housing activity had
declined, although it was difficult to isolate the extent to which these
effects related to the referendum or a more general underlying
slowing,” the minutes said. But the Bank added retail sales had been
stronger than expected in April and that confidence indicators, as a
whole, “remained healthy”.
Interest rates
have been on hold at a record low of 0.5% for more than seven
yearsExpectations of when rates might start to rise back to more normal
levels have been shifted back amid signs the economy may have slowed
recently. Some policymakers and economists have even discussed the
prospect of interest rates being cut further. In the near-term much will
depend on the referendum and market reaction to the outcome.
Read more: Bank of England: economy will be hit hard if Britain leaves EU | Business | The Guardian
