Brexit may worsen unemployment – Bank

Mark Carney, Governor of the Bank of EnglandImage copyright
Getty Images

The Bank of England has given its starkest warning yet that a UK vote to leave the EU in the June referendum could lead to higher unemployment and lower growth.

Its latest Inflation Report forecasts inflation will reach 0.9% in September, as long as the UK stays in the EU.

The report expected that after slowing in the second quarter of the year, growth will pick up in the second half.

It came as the Bank voted unanimously to keep interest rates at 0.5%.

The Bank said that a vote to leave “could lead to a materially lower path for growth and a notably higher path for inflation than in… the report”.

The latest minutes of its interest rate-setting Monetary Policy Committee (MPC) added that a vote to leave the EU could cause sterling to fall “perhaps sharply” and unemployment to rise.

The MPC said: “Households could defer consumption and firms delay investment lowering labour demand and causing unemployment to rise.”

It added that interest rate policy would depend “on the relative magnitudes of the demand, supply and exchange rate effects”.

It said that a lower exchange rate might boost trade, but would be “unlikely to offset the drag on activity from increased uncertainty and and tighter financial conditions”.

However, it noted that the MPC would face the difficult choice of raising rates to control inflation or lowering them to stimulate the economy.


Analysis: Kamal Ahmed, economics editor

In the Bank of England’s assessment of the health of the UK economy, one ringing sentence jumps out: “The most significant risks to the [economic] forecast concern the referendum,” the Monetary Policy Committee says.

It goes on to reveal that far from this simply being a judgement on what Bank officials describe as the “uncertainty spike” around the fact the referendum is taking place at all – this is a judgement that Brexit would have a material effect on the economy.

In a Bank world of carefully chosen words, “material” means significant. And significantly downwards.

Read more from Kamal here.


Chancellor George Osborne said the UK now had a “clear and unequivocal warning” from the MPC as well as the Governor of the Bank of England about the risks of a Leave vote.

“The Bank is saying that it would face a trade-off between stabilising inflation on one hand and stabilising output and employment on the other,” he said.

“So either families would face lower incomes because inflation would be higher, or the economy would be weaker with a hit to jobs and livelihoods. This is a lose-lose situation for Britain. Either way, we’d be poorer.”

Fading

The Bank’s Inflation Report said that uncertainty over the EU referendum was already weighing on economic activity: “There is evidence that a material proportion of the 9% fall in sterling exchange rate since its peak in November could reflect referendum effects.

“It is hard to judge how much of the slowdown reflects a loss of underlying momentum and so may persist and how much is likely to unwind if uncertainty recedes following the referendum.

“Referendum effects will also make it harder to interpret economic indicators over the next few months.”

The Report said that inflation probably fell back to 0.3% in April from 0.5% in March, reflecting the falls in oil and food prices over the last year and the strength of sterling in the same period.

It expected inflation to return to the target 2% level by mid-2018 as these factors faded out.

Brexit may worsen unemployment – Bank

Leave a Reply

Your email address will not be published. Required fields are marked *