The Bank of England said on Thursday (12/05) Britain's economy would slow sharply, even falling into recession, if the country voted to leave the European Union, and that there limits to what the bank could do about it. (Reuters Photo/Luke MacGregor)

Bank of England Says Brexit Slowdown Could Even Mean Recession

BY :DAVID MILLIKEN AND WILLIAM SCHOMBERG

MAY 12, 2016

London. The Bank of England said on Thursday (12/05) Britain's economy would slow sharply, even falling into recession, if the country voted to leave the European Union, and that there limits to what the bank could do about it.

In its starkest warning so far about the impact of an "Out" vote in next month's referendum, the central bank said that sterling could fall sharply and unemployment would probably rise.

"Material slowdown in growth, notable increase in inflation. It is a judgement not based on a whim... It is the judgement of the independent MPC (Monetary Policy Committee) and it is the judgement of all members of the MPC," BoE Governor Mark Carney said at a news conference.

"Of course there's a range of possible scenarios around those directions, which could possibly include a technical recession."

Jitters about the June 23 vote are already weighing on the economy and the central bank trimmed its growth forecast for this year to 2.0 percent from February's estimate of 2.2 percent, even if Britain votes to stay in.

Carney said there there were limits to what the BoE could do in response to an "Out" vote. "Monetary policy cannot immediately offset all the effects of a shock," he said.

Finance minister George Osborne, who has tried to focus voters on what Brexit would mean for their incomes, welcomed the BoE assessment as a "clear and unequivocal warning" that leaving the EU would be a "lose-lose situation for Britain."

Opinion polls suggest British voters have been relatively resistant to warnings about the economic costs to Brexit so far with voting intentions in many polls roughly evenly split.

But Carney's comments ahead of Scotland's 2014 referendum on the costs of independence were viewed as swaying some voters.

He is due to make a high-profile speech at London's Mansion House a week before the vote, alongside Osborne, giving them another platform to speak about the risks of Brexit.

Sterling rose to a six-day high against the dollar after the Bank's policymakers voted unanimously to keep interest rates on hold, pouring cold water on talk that at least one policymaker might vote for a cut. Gilts were little changed after the announcement.

The BoE said half of sterling's 9 percent slide over the past six months was probably due to the referendum, and it could "depreciate further, perhaps sharply" after an "Out" vote.

Britain's government and international bodies have also warned against leaving the EU. The International Monetary Fund is expected to weigh in again on Friday.

"UNWISE WORDS"

Supporters of Brexit argue Britain would benefit from less European regulation and could strike better overseas trade deals on its own. Some have criticized Carney for over-stepping the central bank's line of neutrality.

A former finance minister said the Bank's warnings of economic trouble after a vote to leave the EU carried their own risks. "The governor should be careful that he doesn't cause a crisis," Norman Lamont, who served as finance minister under former Conservative prime minister John Major, said.

"If his unwise words become self-fulfilling, the responsibility will be the governor's and the governor's alone. A prudent governor would simply have said that 'we are prepared for all eventualities'."

Carney said it was the BoE's duty to speak about the short-term economic risks of leaving the bloc.

The Bank cut its forecasts for growth in the next three years due to weaker productivity and more caution among households about spending.

The BoE's main forecasts worked on the assumption that the country would vote to stay in the EU. The only concession made to the referendum was to assume that around half the slide in sterling over the past six months was temporary.

The BoE forecast Britain's economy would grow 2.0 percent this year and 2.3 percent in 2017, down from forecasts of 2.2 percent and 2.4 percent in February.

In two years' time, inflation is forecast to reach a fraction over its 2 percent target, essentially unchanged from the forecast in February. Most economists expect the BoE to raise interest rates early next year if Britain stays in the EU.

Reuters

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