Central bank’s monetary policy committee says pound likely to tumble and markets would react erratically to Brexit, as interest rates remain at 0.5%.
The Bank of England has issued a fresh warning that a vote to leave the EU in next week’s referendum risks knocking economic growth, pushing the pound sharply lower and sending shockwaves through the global economy.
Against the backdrop of jittery financial markets, the Bank also revealed its top policymakers had been briefed by staff on contingency planning for the referendum as it readies measures to prevent markets seizing up in the event of a leave vote next week.
Announcing its decision to keep interest rates at their record low of 0.5%, the Bank said the referendum on 23 June was the biggest immediate risk to UK financial markets, and perhaps those overseas, and that the current uncertainty was already denting spending.
The pound has weakened in the run-up to the vote as opinion polls have pointed to a lead for the leave vote and the Bank warned in minutes to its latest rate-setting meeting that it would fall further in the event of Brexit.
“The outcome of the referendum continued to be the largest immediate risk facing UK financial markets, and possibly global financial markets,” said the minutes. In addition: “On the evidence of the recent behaviour 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.”
The minutes also noted recent comments on potential Brexit risks to global financial markets made by the US central bank as it left interest rates there on hold this week. The record of the Bank’s final rate-setting meeting before the referendum showed all nine members of the monetary policy committee (MPC) voted unanimously to keep interest rates at 0.5%. That was as expected by financial markets and economists, given the impending vote.
The minutes said the MPC had been briefed on contingency planning for the referendum, including on the “more intensive supervision by the Prudential Regulation Authority of major financial institutions to ensure they had sufficient liquidity”.
The Bank said in the minutes that it was “well placed to address liquidity needs and support the functioning of financial markets”. In the minutes, policymakers noted a pick-up in uncertainty ahead of the vote, which could knock economic growth.
“The main focus of the committee’s policy discussion this month concerned the difficulty in identifying the underlying momentum in the domestic economy, amidst the influence on activity of uncertainty related to the EU referendum,” the minutes said.
“Measures of uncertainty had increased further over the past month, with the UK a clear outlier internationally. And there had been growing evidence that uncertainty about the outcome of the referendum was leading to delays to major economic decisions that were costly or difficult to reverse.”
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