Bank of England policymakers intensified their warnings about the risks of leaving the European Union, saying the damage could extend to global markets and the world economy.
Just one week before the UK votes on its membership of the 28-nation bloc, the Monetary Policy Committee — led by Governor Mark Carney — said uncertainty was already having an impact and this could heighten if Britain quits.
That may mean a “materially lower path for growth and a notably higher path for inflation” as well as a rise in unemployment, officials said in a statement on Thursday that accompanied their decision to keep the key interest rate at a record-low 0.5%.
Policy makers also added a new dimension to their caution, highlighting the international threats stemming from the vote. With polls showing the “Leave” campaign is ahead, central banks around the world are on high alert, with the chiefs of the US Federal Reserve, the Bank of Japan, the Bank of Canada and the Swiss National Bank all citing the vote as being potentially disruptive.
“The outcome of the referendum continues to be the largest immediate risk facing UK financial markets, and possibly also global financial markets,” the committee said. A vote to leave could have “adverse spillovers to the global economy” through “financial market and confidence channels,” they said.
“There’s a more global element on the potential impacts of a Brexit,” said Chris Hare, an economist at Investec in London and a former BoE official. “It is material that the committee decided to pick out increasing unemployment as something to put in the minutes and also an impact on the global economy. For me those seem to be the new, slightly firmer pieces of language.”
In the event of a vote to leave, policy makers said they would face a “trade-off between stabilising inflation on the one hand and output and employment on the other.” They said the BoE would take “whatever action was needed” to ensure inflation expectations remain anchored.
The nine-member MPC’s interest-rate decision was unanimous. During the meeting, the committee was briefed on contingency planning for the referendum to ensure financial stability, including: Intensive supervision of banks to ensure they have enough liquidity, the BoE’s additional liquidity operations, access to liquidity from other central banks, swap lines with other central banks, other tools that the Financial Policy Committee could wield.
The BoE’s latest overview of the economy will drag it further into the fractious political debate in the run-up to the June 23 referendum. Having already tussled with some politicians over the central bank’s comments, Carney this week wrote a letter to Conservative lawmaker and “Leave” campaigner Bernard Jenkin, hitting back against criticism.
Chancellor of the Exchequer George Osborne, who backs “Remain” and will speak alongside Carney at the Mansion House in the City of London this evening, tweeted that the MPC is “clear” in its analysis of the damage that Brexit would cause.
A poll by Ipsos Mori for the Evening Standard newspaper released just hours before the BoE decision showed 53% support for leaving with 47% for remaining, excluding those who said they didn’t yet know. The telephone poll was the latest in a string of surveys showing a steady lead for anti-EU campaigners.
“A vote to leave would take a near-term hike off the agenda, but it is not clear that the MPC would necessarily loosen policy either,” said Vicky Redwood, chief UK economist at Capital Economics in London. “Perhaps most likely is that rates would just stay on hold for a further prolonged period.”
On the economy, the BoE said little had changed since its May Inflation Report, noting subdued core inflation and weak productivity growth. It said a pickup in inflation depended on “both a lessening drag from external factors and an increase in domestic cost growth.”
“The main focus of the committee’s policy discussion this month concerned the difficulty in identifying underlying momentum in the domestic economy, amidst the influence on activity of uncertainty related to the EU referendum,” it said.