The Bank of England has warned that extended uncertainty over Brexit could lead to further damage for the UK economy.
The latest meeting of its monetary policy committee (MPC) kept interest rates at their current level of 0.75%, as widely expected.
But in their final rate-setting vote ahead of the current Brexit deadline of 31 October, the policymakers expressed concern that productivity was being damaged by the continued lack of clarity over the UK’s departure from the EU.
While reiterating its position that a no-deal Brexit would slow growth sharply and raise prices, the Bank said that a failure to reach a withdrawal agreement, and a resulting new delay, also posed a risk of heightened weakness.
Parliament has voted to force Prime Minister Boris Johnson to postpone Brexit if he can’t secure an acceptable compromise in negotiations with Brussels.
The Bank said that if a smooth Brexit was achieved, it expected to resume its rate rise path – in stark contrast to the central banks of the US and eurozone which are responding to the US-China trade war with an easing in monetary policy.
The minutes gave a nod to the escalation in the trade dispute, coupled with its growing impact on demand in the global economy.
But the Bank maintained its forecast that the UK would avert a recession in the third quarter of the year, following a fall in output between April and June.
It slightly downgraded its growth expectations for the current three-month period to 0.2% from the 0.3% it predicted in August. It said that was largely explained by summer shutdowns among car producers on top of Brexit-related stoppages in April.
Policymakers also pointed to signs the UK jobs market was cooling.
The minutes said: “Political events could lead to a further period of entrenched uncertainty about the nature of, and the transition to, the United Kingdom’s eventual future trading relationship with the European Union.
“The longer those uncertainties persisted, particularly in an environment of weaker global growth, the more likely it was that demand growth would remain below potential, increasing excess supply.”
The Bank of England spoke up shortly after the Organisation for Economic Co-operation and Development forecast that a no-deal Brexit would cut almost 3% from UK GDP by 2022 and push it into recession.
It said the Bank would be likely to take action to ease the pain in such a scenario, predicting that a 0.5 percentage point cut in interest rates would reduce the damage by about a quarter.
Thomas Pugh, UK economist at Capital Economics, said of the central bank’s determinations: “Even if there were a Brexit deal at the end of October, with inflation well below the 2% target, the MPC is unlikely to feel under much pressure to rush ahead with rate hikes.
“Indeed, we think that the MPC would hold fire until the second half of next year.
“If there is a no-deal then the MPC would probably quickly change its tune and support the economy by cutting interest rates.”