Bank of England cuts forecast in 1st warning of no-deal EU exit

The threat of Britain leaving the European Union this fall without a detailed agreement with the 28-member bloc led the Bank of England Thursday to cut its growth forecast for the next two years.

An activist holds a sign at a demonstration March 12 outside the Houses of Parliament in London, Britain. File Photo by Hugo Philpott

The British central bank said in its revised outlook it expects the British economy to grow by 1.3 percent this year — down from a 1.5 percent expansion it projected in May. Thursday’s update also forecast 1.3 percent growth in 2020, a reduction of 0.3 percent from its initial calculation.

The bank’s forecast downgrade follows Boris Johnson’s taking over as prime minister for Theresa May, whose departure was directly related to the absence of a Brexit agreement. Johnson has vowed to leave the EU on Oct. 31, with or without a deal.

The bank’s new outlook assumes London will leave with an agreement in place, but for the first time it warned of potential consequences of a no-deal, or “hard,” exit.

“In the event of a no-deal Brexit, the sterling exchange rate would probably fall, [consumer] inflation rise and [economic] growth slow,” the Bank of England said.

“Financial market participants’ expectations that the economy would be weaker in the event of a no-deal Brexit also mean that the sterling exchange rate tends to depreciate as the probability of a no-deal Brexit rises.”

“If Brexit proceeds smoothly to some form of deal, asset prices would adjust: the market path for interest rates would be likely to rise, the sterling exchange rate to appreciate, U.K.-focused equity prices to rise, and credit spreads would be likely to fall,” it added. “It is not possible to estimate precisely how asset prices would change in the event of a smooth Brexit. However, information from surveys, as well as observing how asset prices have moved as no-deal betting odds have changed.”

Britain has 240,000 businesses that trade exclusively with the EU and are not ready for border inspections that would follow a no-deal exit. Some wouldn’t have the required documents to sell to EU nations without a new agreement.

The Bank of England’s outlook cited a “material and broad-based slowdown” in world growth since the end of 2017 and said the risk of a recession is now at its highest point in three years, since Britons voted in mid-2016 to leave the alliance.

The bank voted Thursday to leave interest rates unchanged at 0.75 percent, despite continued influence of the trade conflict between the United States and China. It said a “smooth” EU exit, with a trade deal, would probably lead to interest rate hikes “at a gradual pace and to a limited extent” to return inflation to 2 percent, which is the level widely considered reflective of a healthy economy.

ByNicholas Sakelaris