Bank of England warns of Brexit rate rise

Bank of England warns of Brexit rate rise
Bank of England warns of Brexit rate rise

Do not assume that interest rates will be slashed if there is a no deal Brexit, the Bank of England today warns households.

The Bank said that it is just as likely to raise borrowing costs if the UK faces a chaotic Brexit, adding that there was "little monetary policy can do to offset" the impact.

The guidance, contained in the Bank's Inflation Report today, comes as an increasing proportion of currency investors hedge against the risk of a no deal Brexit but is likely to be deemed by Brexiteers to be more "project fear" from Threadneedle Street.

It came as the Bank's Monetary Policy Committee voted unanimously to leave interest rates on hold at 0.75%.

Back in August 2016, the MPC cut borrowing costs by a quarter percentage point and pumped cash into the economy through quantitative easing. Most economists assume that they would do likewise if there was a no deal Brexit and the UK faced a possible recession.

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However, today the Bank said: "current circumstances differ materially from those following the referendum… As Article 50 had not yet been triggered, Brexit was at least two years ago and its nature was highly uncertain. Therefore many of the supply-side effects were distant. At present, inflation is above the target and the MPC judges that supply and demand in the economy are broadly in balance."

The technocratic argument is similar to one the Governor, Mark Carney, used before the referendum when he warned that there were circumstances in which the UK may need higher rates even after it voted Leave. However, in the event, the Bank cut rates faster even than many economists had recommended.

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In its latest forecasts on the UK economy, the Bank left its growth projections essentially unchanged, but added that "business investment had been weaker than previously anticipated, and the recent intensification of Brexit uncertainty appeared likely to keep business spending subdued in the near term."

However, it added: "Under the smooth transition assumption on which the forecast was conditioned, greater clarity was expected to emerge in the coming months and investment growth was therefore expected to pick up."

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