Saturday, 23 February, 2019

BoE sees weakest British outlook since 2009 on Brexit

The Bank of England has slashed this year's growth forecast to 1.2 per cent- the lowest since 2009 The Bank of England has slashed this year's growth forecast to 1.2 per cent- the lowest since 2009
Nellie Chapman | 09 February, 2019, 16:28

The bank's Quarterly Inflation report, released on Thursday, warned that Brexit was having a clear negative impact on the United Kingdom economy, saying that since the last Inflation Report, in November: "The further intensification of Brexit uncertainties, coupled with the slowing global economy, had weighed on the near-term outlook for United Kingdom growth".

Thursday the Bank slashed growth forecast to its weakest in 10-years, growth forecast was cut to 1.2%, its lowest since 2009 when the United Kingdom hit a financial crisis followed by a recession.

India's central bank on Thursday unexpectedly lowered interest rates and, as anticipated, shifted its stance to "neutral" from "calibrated tightening" to boost a slowing economy after a sharp fall in the inflation rate.

"The fog of Brexit is increasing the chances of recession", the Bank of England governor Mark Carney has warned, as he slashed the UK's growth forecast to its weakest for ten years. Analysts say that the pound will rally to buy US$1.40 should Theresa May secure the European Union concessions needed to pass her Brexit withdrawal agreement.

"Governor Das" remark that "there is room to cut' suggests this is not a one and done easing", said Radhika Rao, economist at DBS Bank.

"Given the dynamics of the negotiations, we are now assuming uncertainty remains elevated for a while and that financial conditions stay tighter for longer", he said in a press briefing after the bank's nine-member policy committee kept its main interest rate at 0.75 per cent.

In its accompanying quarterly inflation report, the Bank outlined the volatility of its forecasts depending on Brexit fears, estimating growth could be 1.5 per cent higher over the next three years - at a potential 1.6 per cent in 2019 - if a favourable deal is reached and uncertainty disappears. A clarification from the central bank is awaited.

Governor of the Bank of England Mark Carney
Governor of the Bank of England Mark Carney

"This sent sterling to a two week low around $1.29 ahead of today's announcement from the BoE, and it fell a further third of a cent in the immediate aftermath".

Some economists also felt that there was a danger that a largely independent central bank could come under government pressure - providing too much stimulus for the economy after last week's budget handouts.

Although it did hold out the hope of a recovery later this year if an orderly deal is negotiated by the March deadline.

It forecasts output expanding by a healthier 1.9% in 2021.

Rain Newton-Smith, the chief economist at the CBI, the business lobby group, said: "It's now crunch time - a no-deal scenario must be taken off the table because the economy is seizing up from uncertainty". If, as much of the market expects, data out of the world's largest economy begins to turn south, we could see the EUR/USD rate retrace some of its losses in the coming sessions.

Assuming a smooth Brexit, policy makers reiterated that limited and gradual rate increases will be necessary.