Bank of England warns leaving EU likely to trigger slower growth

[LONDON] The Bank of England warned that a British exit from the European Union would create extended uncertainty and likely hurt the economy in the short run, minutes from their latest policy meeting showed on Thursday.

This was the strongest warning yet from the body that sets British interest rates and comes two days after the International Monetary Fund said the world economy could suffer if Britain votes to leave the EU in a referendum on June 23.

"Such a vote might result in an extended period of uncertainty about the economic outlook, including about the prospects for export growth," the Bank's Monetary Policy Committee said in minutes from their April 13 meeting. "This uncertainty would be likely to push down on demand in the short run... (and) have significant implications for asset prices, in particular the exchange rate."

For the first time, rate setters said that they had seen signs that the upcoming vote was affecting business decisions, with a striking fall in commercial property sales, delayed investment and fewer company listings. "This might lead to some softening of growth in the first half of 2016," they said.

BOE Governor Mark Carney has described Brexit as the biggest domestic financial stability risk and highlighted the gains from an open trading relationship with the EU, drawing criticism from pro-Brexit lawmakers, despite the BOE's formal neutral stance.

Thursday's minutes build on these comments from Mr Carney, based on clearer evidence about the effect the referendum debate is having on the British economy.

The nine members of the Monetary Policy Committee were unanimous in their view that interest rates should stay at their record low 0.5 per cent and there remained a range of views about the outlook.

Policymakers said they would react more cautiously to economic data around the referendum.

Consumer price inflation touched a 15-month high last month of 0.5 per cent, while the core inflation measure closely watched by the BOE hit 1.5 per cent - its strongest since October 2014 and above all forecasts in a Reuters poll.

But the BOE said it expected inflation to recede this month as an Easter surge in airfare prices fades, adding that growth in unit wage costs was below levels consistent with meeting its 2 per cent inflation target.

The pound has lost more than 7 per cent this year on a trade-weighted basis and reached a 2-1/2-year low last week.

Last month the BoE minutes said that a "significant proportion" of sterling's recent decline reflected uncertainty around the referendum, and this month they added that it was not clear how long this would last.

The BOE reiterated that interest rates were more likely to rise than not over the next three years and that when they did the rise would be gradual, given likely headwinds.

Financial markets have fully priced out the possibility of an interest rate hike this year prior to the BoE meeting and some are even betting the first move will be a cut.

The consensus of economists polled by Reuters shows the first interest rate hike in the first quarter of 2017.

REUTERS