LONDON: The Bank of England warned of an adverse spill over to the global economy if Britain votes in a week’s time to quit the European Union here the other day.
The bank’s Monetary Policy Committee (MPC) at its meeting voted unanimously to maintain the bank rate at 0.5 percent.
In its statement issued Thursday, the bank said a vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy.
“Households could defer consumption and firms delay investment, lowering labor demand and causing unemployment to rise. Through financial market and confidence channels, there are also risks of adverse spill-overs to the global economy,” their statement said.
The MPC said it had set its monetary policy to meet its 2 percent inflation target, and in a way that helps to sustain growth and employment.
It said 12-month CPI inflation was 0.3 percent in May and remains well below the 2 percent inflation target.
In its detailed assessment of the economic outlook in the May Inflation Report, MPC said growth in the United Kingdom’s major trading partners is expected to continue at a modest pace over the next three years.
“In China and other emerging markets, the prospects for activity are little changed and medium-term risks remain to the downside,” it added.
The report said on the evidence of the recent behavior of the foreign exchange market, it appears increasingly likely that, were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply.
“This would be consistent with changes to the fundamentals underpinning the exchange rate, including worsening terms of trade, lower productivity, and higher risk premia,” said the MPC report.
In addition, UK short-term interest rates and measures of UK bank funding costs appear to have been materially influenced by opinion polls about the referendum.
“These effects have also become evident in non-sterling assets: market contacts attribute much of the deterioration in global risk sentiment to increasing uncertainty ahead of the referendum. The outcome of the referendum continues to be the largest immediate risk facing UK financial markets, and possibly also global financial markets,” the report said.
