BOE says Brexit may weigh on growth as key rate kept at 0.5%

A war memorial statue is seen in front of the Bank of England in the City of London, Britain, in this March 29, 2016 file photo.  REUTERS/Toby Melville/Files


Bank of England officials said the U.K.’s European Union referendum may already be weighing on growth as they kept their key interest rate at a record low.
The nine-member Monetary Policy Committee, led by Governor Mark Carney, unanimously agreed to maintain the benchmark at 0.5 percent — where it’s been for more than seven years. In a ramping up of the language used last month, the minutes of the April 13 decision showed officials considered the implications for policy of a vote to exit the EU and said it may have “significant implications” for asset prices and the pound.
“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.”
While Carney has already signaled a slow path toward tightening, and investors see no rate increase for years, the referendum is creating a challenging backdrop for policy. The International Monetary Fund cut its 2016 forecast for U.K. growth on Tuesday over concerns about the “severe damage” a Brexit could inflict.
The pound stayed lower against the dollar after the announcement and was trading at $1.4143 as of 12:28 p.m. London time, down 0.4 percent on the day.

Increased Caution
Policy makers said they intend to react “more cautiously” to data in the lead up to the vote. The comments come as recent reports indicate a slowing 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.
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. 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.
Britain’s 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.
“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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