Economic activity is expected to further decelerate in the second quarter this year amid fears of the UK leaving the European Union, the Bank of England has warned, as the Monetary Policy Committee votes to keep rates on hold.
The BoE’s May inflation report, published today, says activity growth slowed in the first quarter of this year and “a further deceleration is expected in Q2”.
The central bank cut its growth forecast for 2016 to 2 per cent compared with the 2.2 per cent expected in February’s inflation report.
The report states that a vote to leave the EU could “materially alter the outlook for output” and that “there are increasing signs that uncertainty associated with the EU referendum has begun to weigh on activity”.
The report says: “This is making the relationship between macroeconomic and financial indicators and underlying economic momentum harder to interpret at present.
“In the Committee’s latest projections, activity growth recovers later in the year, but to rates that are a little below their historical average. Growth over the forecast horizon is expected to be slightly weaker than in the February projection.
“The May projection is conditioned on a path for bank rate implied by market rates and on continued UK membership of the European Union, including an assumption for the exchange rate consistent with that.”
The CPI inflation increased to 0.5 per cent in March but remains well below the 2 per cent inflation target, the central bank says. Meanwhile, the Monetary Policy Committee decided to keep rates at 0.5 per cent.
The report said bank rates will be gradually increasing but “to a lower level than in recent cycles”. It said this guidance is more an expectation and “not a promise”.
It said: “With macroeconomic and financial indicators likely to be less informative than usual in light of the referendum, the committee is currently reacting more cautiously to data.”
Towry head of investments Andrew Wilson says the BoE needs to maintain some level of impartiality ahead of the referendum.
Wilson says: “The cut in the growth forecast for Q2 seems sensible, and we also agree that the second half of the year could be stronger for the UK than the first, particularly in the case of a ‘Remain’ vote.
“Whether the UK economy can actually hit 2 per cent for the year however, is debatable as this would imply movement above the current growth trend.”