Bank Of England May Have To Downgrade Growth Forecast Amid EU Vote Uncertainty

Bank Of England May Have To Downgrade Growth Forecast Amid EU Vote Uncertainty

The Bank of England could be forced to downgrade its forecast for UK growth on Thursday if it thinks the economy is slowing down ahead of June's EU referendum vote.

The Bank's nine-strong Monetary Policy Committee (MPC) is expected to vote unanimously to keep interest rates at 0.5%, where they have been since March 2009, despite signs that the economy is beginning to falter.

But latest forecasts in the Bank's quarterly inflation report, which will be published at the same time as the rates decision and minutes, will be in sharp focus amid mounting evidence that referendum uncertainty is hurting the economy.

Growth slowed to 0.4% in the first three months of 2016, down from 0.6% in the fourth quarter of last year, following an industrial sector slump.

And a recent flurry of gloomy reports suggests activity has pulled back sharply since then due to Brexit fears.

Closely watched surveys from the three main sectors of the economy signalled growth may be on course to slow to 0.2% in the second quarter - its weakest level since 2012.

But Bank governor Mark Carney has a delicate balancing act to negotiate, with the Bank determined not to be drawn into the EU debate.

He is likely to face questions at his so-called Super Thursday conference over the possibility of a cut in interest rates, following recent reports that the Bank asked banks to prepare for a reduction in rates in the event of a Brexit vote.

The Bank has until now been adamant that the next move in rates will be up.

Economists at ING said: "We suspect the MPC will be wary of provoking volatility ahead of the referendum and will look to avoid opening the Pandora's box on prospects for additional near-term easing."

The market will also study the report to see if the MPC is concerned the slowdown in the economy is tied to the global easing of markets.

The MPC in February previously forecast UK gross domestic product growth of 2.2% this year and 2.4% in 2017.

But economists at JP Morgan say the MPC may downgrade its GDP forecast this year to 2%, due to softening growth.

IHS Global Insight chief UK and European economist Howard Archer said: ''The minutes of the May MPC meeting will be scanned to see just how concerned the MPC are over the current slowdown in the UK economy and whether they are starting to become increasingly worried that the economy may struggle to regain momentum in the second half of the year even if uncertainty is diluted by a vote to stay in the EU.''

The bank's outlook for inflation will also be key, with the bounceback in oil prices likely to push the consumer prices index (CPI) higher over the coming months.

The CPI already hit its highest level for 15 months in March, at 0.5%.

If the Bank sees the CPI rising above its 2% target in 2018, it would indicate that the MPC will need to raise rates.

But with growth looking shaky, the Bank would not be in any hurry to tighten monetary policy.

IHS Global Insight does not see the MPC raising interest rates from 0.5% to 0.75% until May 2017, although Investec is pencilling in a rise this November, assuming a Remain vote in the referendum.


What's Hot