Thursday, May 12, 2016
Bank of England holds and says that Brexit could lead to recession
Another month, another hold.
The Bank of England's Monetary Policy Committee has once again unanimously voted to leave its base interest rate at 0.5%.
It also reiterated its belief that Britain's European Union referendum is the "most significant risk" to the British economy, with governor Mark Carney saying that risks "could possibly include a technical recession."
"We would expect a material slowing in growth," Carney said in a press conference after the bank's rate decision. When pressed about that meant, Carney said he couldn't rule out recession.
Despite inflation starting to grow — CPI hit 0.5% at the last reading — the BoE is remaining dovish in tone thanks to the state of GDP growth, which slowed to 0.4% in Q1 2016, and the upcoming Brexit referendum, which has effectively put the British economy into a holding pattern.
Here's the key quote from the minutes of the MPC's meeting:
The most significant risks to the MPC’s forecast concern the referendum. A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy. Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. Sterling is also likely to depreciate further, perhaps sharply.
Carney has been pretty unequivocal in his belief that Brexit risks are "the biggest risks facing the UK economy," in recent weeks. However today's warning about a possible recession is the strongest language he has used so far.
Carney's stance has led to criticisms from some Brexit backers, including Tory MP Jacob Rees-Mogg, who accused the governor of making "speculative pro-EU comments" that are "beneath the dignity of the BoE."
On Thursday, the BoE's interest rate decision took a back seat to the bank's comments on Brexit. Rates have been on hold since March 2009, when the committee first cut the Bank Rate to 0.5%. May's decision marks 86 consecutive months of the same base rate.
All nine members of the bank's Monetary Policy Committee voted to hold for a fourth straight month, despite market speculation that at least two members of the committee were considering voting for a cut.
In February, the MPC's sole hawk Ian McCafferty, who had previously voted for a rise to 0.75%,changed his position and voted to hold rates, a position that has remained ever since.
General market consensus has been pricing the next interest rate hike as far out as 2020, with many analysts now predicting a cut long before a hike.
Along with the hold, the BoE also released its quarterly Inflation Report, on Thursday afternoon, detailing the bank's outlook on Britain's inflationary climate. The MPC also voted to keep the bank's Asset Purchase Facility at £375 billion ($542 billion).