Bank of England to hold steady ahead of key vote

10/05/2016 04:53 AST

In normal circumstances, the Bank of England might be close to pumping more stimulus into Britain’s economy, given recent signs of a sharp slowdown in growth and a rise in the number of people out of work.

But Governor Mark Carney and his fellow rate-setters are all expected to take a wait-and-see approach this week, effectively dismissing most of the slowdown as due to temporary jitters before Britain’s historic European Union referendum on June 23.

A Reuters poll of economists predicted that the nine members of the Monetary Policy Committee will maintain their united front and vote unanimously to keep borrowing costs on hold at their record-low 0.5 percent.

Alan Clarke, an economist with Scotiabank, said the MPC had previously held its nerve in the face of temporary influences on the inflation outlook.

“Overall, we suspect that the committee will still vote 9-0 in favor of unchanged Bank Rate at this meeting. However, our conviction is not that high and the chance of at least one dissent in favor of a rate cut has got to be approaching 50 percent,” he said in an e-mail to clients. The BoE has already said the lack of clarity about the referendum’s outcome has caused companies to put investment plans on hold.

However last month it said it would be less sensitive than usual to changes in economic data around the time of the vote.

If British voters take the historic step of deciding to leave the EU, then the BoE might try to offset the expected shock to the economy by cutting interest rates and possibly expanding its 375 billion-pound bond-buying program.

But for now, economists expect the BoE to continue to exclude the impact of an “Out” vote from the projections that underpin its decisions on interest rates.

The MPC is due to publish its latest quarterly forecasts alongside its monthly decision on rates at 1100 GMT on Thursday.

The drag from uncertainty around the referendum is likely to lead the Bank to cut its economic growth forecasts to below Britain’s long-run average, economists said.

But key inflation forecasts are unlikely to be revised down because of the recent fall in the value of sterling and a recovery in global oil prices, economists said.

Inflation was forecast in February to slightly overshoot its 2 percent target in 2-3 years’ time, but despite this financial markets do not price in a first rate rise until 2019. Most economists expect a move next year.

Carney is expected to face more questions about the impact of a vote to leave the EU when he holds a news conference shortly after the Bank’s policy decision and quarterly forecasts are published.

He has previously described a so-called Brexit decision as the biggest domestic risk to Britain’s financial stability and the Bank has said the country’s economy has benefited from its membership of the EU.

Those comments have drawn criticism from campaigners who want Britain out of the EU. Former finance minister Nigel Lawson has accused Carney of over-stepping his remit and venturing into politics.

“The governor will be extremely wary of being seen as wading in on the Brexit debate,” Capital Economics’s Paul Hollingsworth said.

“That said, with Mr.Carney likely to underline that uncertainty about the outcome of the referendum is weighing on the economy at present ... his comments no doubt will be interpreted as being supportive of ‘Remain’.”

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