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Bank of England faces Brexit balancing act with new outlook

Bank of England faces Brexit balancing act with new outlook
May 12, 2016
LONDON - Bank of England Governor Mark Carney will tread carefully back into Britain's debate on whether to leave the European Union on Thursday, when he sets out the central bank's latest forecasts against the most uncertain economic backdrop in years. The BoE is expected to avoid taking the politically sensitive step of issuing a separate, stand-alone set of forecasts for what a so-called Brexit would do to the economy. Anti-EU campaigners have already accused Carney of showing bias by highlighting the risks of a so-called Brexit to Britain's financial system and by saying Britain had benefited from its four-decade membership of the EU. But the BoE will probably acknowledge the potential for a shock if voters decide to pull Britain out of the EU at the referendum on June 23. "The Bank only wants to wade into this debate so far, and that is not very far," Ross Walker, an economist with RBS said. The BoE might hint at the economic effects of the uncertainty surrounding Brexit, possibly by showing a bigger-than-usual scope for the economy to underperform its central forecasts, Walker said. So far in 2016, Britain's economy has lost a lot of the momentum that helped it outpace most other rich countries over the previous three years. Many economists link the slowdown to uncertainty over the outcome of the referendum, and the BoE has said it has seen signs of a drop in investment ahead of the vote. While Carney has said the BoE has a long history of not getting drawn on different political outcomes when it comes to its economic forecasts, it will find it hard not to look at at least some of the short-run impacts of leaving the EU. Many of the factors that feed into its forecasts, such as low market interest rates and weak sterling, are already pricing in some chance of Britain quitting the EU. Taking those at face value could result in a higher-than-expected inflation forecast from the BoE, which investors could interpret as a sign that the Bank is moving more quickly towards an interest rate hike. The Bank is expected to say on Thursday that its nine Monetary Policy Committee members voted to keep rates on hold at a record low of 0.5 percent, where they have sat since the depths of the financial crisis more than seven years ago. Two MPC members have hinted at support for a rate cut but most economists expect they will wait until after the June 23 referendum, when the outlook for Britain's economy is clearer, before putting stimulus options on the table. Most economists say the next move by the BoE will be a rate hike by early next year, if Britain decides to stay in the EU. -Reuters
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