BoE warns on heightened no-deal Brexit prospect

Andrew Cummings
June 22, 2019

"Today's minutes do no alter our view that the Committee likely will raise the bank rate around the end of the year, when data showing that GDP rebounded in the third quarter will be to hand, inflation pressures will have built further and the Brexit deadline likely will have been extended again".

Most economists, including those at the Bank of England, think that leaving without a deal will cause huge damage to the British economy as trade with the European Union is hit by tariffs and other disruptions.

Globally, trade tensions have intensified.

The bank downgraded its growth outlook for the second quarter to zero from 0.2 percent as the factors that underpinned first quarter growth faded. The favorite, Boris Johnson, has indicated that he's prepared to go ahead with a "no-deal" Brexit.

The central bank said the monetary policy response to Brexit will not be automatic and could be in either direction.

The stockbuilding boost that saw growth accelerate to 0.5% in the first quarter ahead of the original March 29 Brexit deadline had begun to unwind in the second quarter, as predicted, the Bank said.

Official data meanwhile showed that British retail sales sank last month, painting a downbeat picture of the Brexit-facing economy. Growth has continued, albeit at lower levels, and unemployment has fallen to a 45-year low of 3.8%. That is expected to continue in coming months.

Longer-term, all hinges on Brexit. The Bank of England retains its stance that the country will leave in an orderly manner.

This results in yet another contrast and twist from a central banker when you consider that BoE Governor Carney, made optimistic comments on the potential for higher interest rates in the United Kingdom just one week ago!

The BoE has repeatedly said that interest rates will need to rise faster than the market now expects, although it has made any rate hike contingent on Britain having a smooth exit from the European Union.

Sterling lost some of its early gains on the news, but was still trading 0.4% up against the dollar at 1.27.

"We think it is unlikely the bank will hike rates this year", said James Smith, developed markets economist at ING. "Domestically, uncertainty is likely to remain elevated — particularly given that we see an increasing probability of a general election later in the year".

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