Bank of England says Brexit uncertainties ‘more entrenched’

LONDON – Brexit uncertainties are becoming “more entrenched” and increasingly weighing on the British economy less than three months before the country is scheduled to leave the European Union, the Bank of England said Thursday.

The bank’s nine monetary policymakers unanimously decided to keep the bank’s main interest rate on hold at 0.75% and said heightened fears about the possibility of a disorderly and disruptive no-deal Brexit were hobbling growth and likely to keep business investment in check over the coming months.

In quarterly projections published alongside the interest rate decision that are conditioned on a smooth Brexit scenario, the bank said economic growth in the second quarter is set to be flat, down from 0.5% in the first three months. That, it said, is partly related to the unwinding of Brexit contingency measures that firms took in the run-up to the original March 29 Brexit deadline, as well as a higher probability of a no-deal Brexit and worries over a trade war between the U.S. and China.

The bank is now forecasting growth this year and next of 1.3%, down from 1.5% and 1.6%, respectively. Its forecasts also indicated that the country could also be slipping into recession early next year in light of all the Brexit uncertainties – its forecasts suggested there’s a one-in-three chance of that happening.

“Global trade tensions have intensified, global activity has remained soft and the perceived likelihood of a no-deal Brexit has increased significantly,” Bank Governor Mark Carney said.

Carney said concerns over a no-deal outcome have led to a “marked depreciation” of the pound, and that the currency would fall further in the event the country leaves the EU without a deal.

The pound has already fallen sharply in recent days to a 28-month low below $1.21, as new Prime Minister Boris Johnson escalated talk of a no-deal Brexit and put his government on notice that Britain will leave the EU on Halloween, the current Brexit date, come what may.

Most economists think that a no-deal Brexit would plunge the British economy into recession as firms struggle to cope with the subsequent imposition of tariffs on traded goods. The bank has previously warned that a worst-case rupture could see the British economy shrink by 8% in a matter of months after Brexit, though it has since indicated that better preparedness for such an outcome mean that the likely recession would not be as severe.

Since Britain voted to leave the EU in June 2016, the bank has assumed that its departure would be orderly, that Britain would negotiate a settlement with the EU which would lead to a smooth pathway to a new future trading relationship. Though Johnson’s predecessor,

Theresa May, negotiated a deal with the EU, it was rejected by the British Parliament on three occasions.

Johnson has said he wants a renegotiation but won’t join in if the EU rejects opening up the so-called withdrawal agreement. The EU says that’s not open for discussion, hence the rising talk of a no-deal Brexit and the pound’s woes. Though Johnson has embarked on this no-deal path, it’s not clear whether he would be able to push it through given what appears to be a majority in Parliament against. As a result, there’s also growing talk that Johnson may seek to call a general election in the run-up to Brexit and that he will stand on a no-deal platform.

Rate-setters said there is mounting evidence that all this no-deal Brexit talk is being felt across the economy and that business investment will likely continue to “remain weak until that uncertainty dissipated.” Business investment has been particularly weak since the Brexit vote and is around 20% below where the bank thought it would have been had the country voted to remain in the EU.

Were Britain to leave the EU in an orderly fashion, the bank said there would be some upside to the British economy as executives breathed a sigh of relief that the uncertainty had largely been ended and put in motion those dormant investment plans. However, it did note that a Brexit deal would likely see the pound rise again and that would limit some of the upside.

In a smooth Brexit scenario, rate-setters said growth would accelerate to “robust” levels in the second half of 2020, “reflecting a gradual recovery and firm U.K. domestic demand growth, driven in large part by a recovery in investment growth as uncertainties dissipated.”