Growing uncertainty over Brexit and a general slowdown in the global economy were identified to the reasons by the Bank of England (BOE) to be the reasons for the UK economy to potentially registering the weakest economic growth in a decade for 2018.
The interest rates were left unchanged in an unanimous voting by the nine-member Monetary Policy Committee (MPC), led by Mark Carney, of the BOE even as less than 50 days now remain for the official departure of the UK from the European Union.
“U.K. economic growth slowed in late 2018 and appears to have weakened further in early 2019,” said representatives of the UK central bank. “This slowdown mainly reflects softer activity abroad and the greater effects from Brexit uncertainties at home,” they added.
The outlook for economic growth for 2019 was significantly brought down by the BOE and it put it at 1.2 percent in their statement on Thursday. In comparison, the central bank had pegged the growth outlook at 1.7 percent for 2019.
This down grading of the growth outlook is the largest by the bank since soon after the Brexit vote in 2016. This prediction by the BOE also means that it expects the UK economy to grow at its slowest since the global financial crisis.
The BEO predicts that in 2020, the country would register growth of 1.5 per cent.
Additionally, in the near-term, inflation rates would fall below its target of 2 per cent because of a cooling in global crude prices, said BOE Governor Mark Carney. He however stated that it would increase to settle “a little above” the inflation target within another year.
The warning about the economic growth and its projections also coincide with the meetings of Prime Minister Theresa May with EU leaders where she is trying to bring in legally binding changes to the Brexit deal and convince the European leaders to agree to the same.
“The fog of Brexit is creating tension in financial markets,” Mark Carney said during a press conference on Thursday. “Now, how these tensions are reconciled once the fog lifts will have consequences for the path of monetary policy in ways that cannot be predicted in advance,” he added.
The main topic of contention would be the contentious issue of the Irish “backstop” which is a method to prevent the creation of a hard border between the Republic of Ireland and Northern Ireland in case of a no deal Brexit. May has been forced to try and bring in legally binding changes to the backstop arrangement in the Brexit deal with the EU after strong opposition to the issue by UK lawmakers.
“There’s an upside. If there’s clarity on the deal sooner and we know the direction we’re headed sooner and there’s a smooth transition to that destination… we would expect the economy to pick up even more than in this forecast,” Carney said.
The BOE has said that it would consider raising of rates for combating a likely drop in the value of sterling in case there is a no deal Brexit and an abrupt exit of the fifth largest economy of the world from the EU.
But according to economists, the BOE is talking about the possible rate hike because of fears of a slowdown in the UK economy in case of a no deal Brexit.
“I think that the Bank does want to keep its options open and it does want to send a signal. Don’t expect us to necessarily be cutting interest rates on a hard Brexit if the inflation risks are too strong,” Jane Foley, head of FX strategy at Rabobank, told the media in an interview on Thursday.
(Adapted from CNBC.com)