BoE Says Uncertainty Associated with EU Referendum Weighing on Activity

BoE Says Uncertainty Associated with EU Referendum Weighing on Activity

12 May 2016, 13:29
Roberto Jacobs
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BoE Says Uncertainty Associated with EU Referendum Weighing on Activity

Activity growth slowed in Q1 and a further deceleration is expected in Q2 and according to the BoE, “there are increasing signs that uncertainty associated with the EU referendum has begun to weigh on activity.”

According to the monetary policy summary, the most significant risks to the MPC’s forecast concern the referendum. A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy, said the BoE.

"Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. Sterling is also likely to depreciate further, perhaps sharply. This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation than in the central projections set out in the May Inflation Report. In such circumstances, the MPC would face a trade-off between stabilising inflation on the one hand and output and employment on the other. The implications for the direction of monetary policy will depend on the relative magnitudes of the demand, supply and exchange rate effects. Whatever the outcome of the referendum and its consequences, the MPC will take whatever action is needed to ensure that inflation expectations remain well anchored and inflation returns to the target over the appropriate horizon.


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