BoE warns risk of no-deal Brexit has increased

Ben PERRY
The Bank of England worries about rising chances of a no-deal Brexit (AFP Photo/Adrian DENNIS)

London (AFP) - The prospect of Britain crashing out of the European Union without a deal has risen since last month, the Bank of England warned Thursday, as it kept interest rates unchanged.

"Domestically, the perceived likelihood of a no-deal Brexit has risen" since May, the BoE said in a statement after its Monetary Policy Committee (MPC) kept the central bank's main borrowing cost at 0.75 percent.

"Since the Committee's previous meeting... downside risks to growth have increased. Globally, trade tensions have intensified," said the BoE, whose Governor Mark Carney is set to step down on January 31, having extended his tenure twice owing to Brexit uncertainty.

"As expected, recent UK data have been volatile, in large part due to Brexit-related effects on financial markets and businesses," it added.

The central bank on Thursday downgraded its forecast for second-quarter UK economic growth to zero from 0.2 percent.

The UK's "economic outlook will continue to depend significantly on the nature and timing of EU withdrawal", it added.

- 'Happy to sit on its hands' -

Britain is scheduled to leave the bloc on October 31, when it will lose access to major markets covered by EU trade agreements.

Without a Brexit deal between London and Brussels, the UK will default to "third country" status with the EU, with trade relations run on World Trade Organization rules.

The MPC on Thursday added that the prospect of future UK rate hikes had also lessened because of Brexit.

"Increased Brexit uncertainties have put additional downward pressure on UK forward interest rates and led to a decline in the sterling exchange rate," it said.

Analysts do not expect a rise in British interest rates any time soon, also owing to falling UK annual inflation and against a background of dovish tones from the Federal Reserve and European Central Bank in recent days on their outlooks for US and eurozone borrowing costs.

"Given the drop in (UK) GDP in April and the fall in inflation back to target in May, there was never much chance that the MPC would raise interest rates from 0.75 percent today," noted Thomas Pugh, UK economist at Capital Economics research group.

"What's more, the tone of the (BoE) statement and minutes followed the lead from the Fed and the ECB and softened a little compared to May, indicating that the MPC is happy to sit on its hands for the time being" regarding rates.

British annual inflation has dipped to the Bank of England's 2.0-percent target rate, official data showed Wednesday.

The Consumer Prices Index (CPI) rise over 12 months eased back in May from 2.1 percent in April.

Official data meanwhile showed that British retail sales sank last month, painting a downbeat picture of the Brexit-facing economy.

Sales by volume sank by 0.5 percent from April, when they had dipped by 0.1 percent, the Office for National Statistics said ahead of Thursday's announcements by the BoE.