UK economy caught in Brexit crossfire
Gross domestic product expanded 0.1 percent in the first quarter of the year, the Office for National Statistics (ONS) said in a statement, confirming an initial estimate.
In a speech late Thursday, Carney warned that the UK central bank’s Monetary Policy Committee (MPC) could take action similar to that following the Brexit referendum vote, when it cut its main interest rate under an emergency package of measures aimed at stimulating the British economy.
“A sharper Brexit could put monetary policy on a different path” to market expectation of rate hikes, Carney told a group of economists in London.
“For example, if the transition were disorderly, or the end state agreement materially worse than the average potential outcome, then the MPC (…) can be expected to set policy to manage any trade-off using the framework it applied following the referendum.”
After Britain voted in June 2016 in favour of exiting the European Union, the Bank of England quickly cut its main interest rate by a quarter point to 0.25 percent.
It has since lifted borrowing costs back up to 0.50 percent to help bring down inflation.
Britain’s Brexit transition period is due to run from the country’s EU departure in March 2019 until the end of 2020.
British lawmakers however on Thursday warned that Britain may have to extend its post-Brexit transition period as far as 2023 to avoid a hard border between Northern Ireland in the UK and Ireland.
And Brussels has said there needs to be progress on the key issue of the future of the Irish border by the June 28-29 EU summit to get a Brexit deal by the time Britain leaves next year.
“A worsening of the UK’s economic outlook or the increased likelihood of a more disruptive Brexit could well see the BoE follow the European Central Bank in delaying the process of monetary normalisation,” Pablo Shah, economist at the Centre for Economics and Business Research said on Friday.
Major central banks are seeking to lift interest rates back towards pre-financial crisis levels over the coming years. The Federal Reserve is managing to achieve this, with the US central bank on course to lift borrowing costs several times this year as the world’s biggest economy strengthens and inflation rises.
In the UK, “while some of last quarter’s slowdown can be attributed to the adverse weather, it also reflects a number of less transient factors including a slowdown in consumer spending growth and investment”, Shah added.
Earlier this week, Carney said British real household incomes were about £900 ($1,200) lower than forecast in 2016 since the vote to leave the EU, noting that businesses are “holding back” over Brexit uncertainty.
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