BOE keeps benchmark rates, warns over Brexit

The Bank of England

The Bank of England

June 17, 2016 (LBO) – The Bank of England (BOE) left its benchmark bank rate unchanged at 0.50 percent and warned about the risks to growth and inflation from a decision to leave the European Union.

The Bank has set the monetary policy to meet the 2 percent inflation target that helps to sustain growth and employment.

Twelve-month CPI inflation was 0.3 percent in May and remains below the 2 percent inflation target and commodity prices have risen since May, however, with sterling oil prices in particular having increased by around 10 percent.

The Bank has also decided to maintain the stock of purchased assets financed by the issuance of central bank reserves at 375 billion pounds.

“On the evidence of the recent behavior of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply,” BOE said.

“This would be consistent with changes to the fundamentals underpinning the exchange rate, including worsening terms of trade, lower productivity, and higher risk premium.”

In addition, UK short-term interest rates and measures of UK bank funding costs appear to have been materially influenced by opinion polls about the referendum.

BOE said these effects have also become evident in non-sterling assets: market contacts attribute much of the deterioration in global risk sentiment to increasing uncertainty ahead of the referendum.

The outcome of the referendum continues to be the largest immediate risk facing UK financial markets, and possibly also global financial markets, BOE further stated.

“A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy,”

“Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise.”

The BOE however has drawn considerable criticism for its comments on how next weeks’ vote on the EU could affect their economy.

Replying to charges, BOE Governor Mark Carney has said it was the central bank’s responsibility to point out the economic risks of a vote to leave the EU and he would be failing to public if he did not flag danger in advance.