Brexit vote would damage UK economy, may push BoE to cut rates

[LONDON] A British vote to leave the European Union on June 23 would hurt the economy, an overwhelming majority of economists said in a Reuters poll, and could push the Bank of England to cut interest rates for the first time since the financial crisis.

Conversely, if the outcome was to remain a member of the EU, those saying there would be a net positive economic boost and those saying neutral were roughly split.

"Both the UK and Europe risk a fall into recession in the following quarters due to the increased uncertainty. One has to take into account that the UK is the second largest economy in the EU so this is a big deal," said Mikel Milhoj at Danske Bank.

Britain's economy could be one of the fastest growing among developed nations, expanding 1.9 per cent this year and 2.1 per cent next, the poll of economists based in the UK and across Europe found - but that would be under threat from Brexit, as leaving the EU is known.

"Recessionary in the short-term," said Philip Rush, UK economist at Nomura based in London, adding that "longer term effects (are) less clear-cut." BayernLB economist Manuel Andersch, based in Munich, was more emphatic: "Short-term disaster, long-term damage."

Thirty-one of the 35 economists polled said the economic impact from Britain leaving the EU would be negative and four said it would have no effect. None said a Brexit would be positive for the economy.

Roughly two-thirds of those who answered questions on Brexit were UK-based, but there were no differences in answers provided based on geography. The sample was the monthly panel of forecasters on the British economy, at banks, fund management companies and independent research firms, who quite often disagree with each other.

On Tuesday, the International Monetary Fund cut its 2016 growth forecast for Britain to 1.9 per cent from 2.2 per cent and said the country could deal a damaging blow to the fragile world economy if it votes to leave the EU.

The findings of the latest poll were nearly identical to a Reuters poll of mainly UK-based economists taken about two months ago that showed an overwhelming view remaining in the UK would be best for the economy.

If the vote does go in favour of the "In" campaign, Britain's beaten-down pound would rally 4 per cent against the dollar in the immediate aftermath, a separate Reuters poll of foreign exchange strategists found last week.

While opinion polls on the referendum suggest the result could be very close, most have come marginally in favour of an "In" win and betting firms are also pricing that in. One poll published Tuesday, however, showed the Leave campaign three points ahead.

After public opinion polls failed to predict a Conservative Party victory in Britain's 2015 parliamentary election there is a great deal of uncertainty around their accuracy.

What's more certain is inflation won't reach the Bank of England's 2 per cent target anytime soon. The latest Reuters survey suggested it would be the second half of 2017 at least before it even gets close.

Low oil prices have meant most central banks have struggled to get inflation to rise and the BoE won't be lifting interest rates from a record low until early next year, a separate Reuters poll found earlier this month.

But a move from 0.5 per cent, which would be the first change in over seven years, could also be swung by a Brexit vote. Seventeen of 26 economists in the poll said if Britain decides to leave the Bank's next move would likely be a cut.

"If the UK votes to leave the EU, then the BoE is likely to cut interest rates to 0.25 per cent, but also restart quantitative easing," said Azad Zangana, London-based senior economist at asset management firm Schroders.

REUTERS