Bank of England leaves policy unchanged, warns about Brexit

The Bank of England Monetary Policy Committee (MPC) voted unanimously to maintain Bank Rate at 0.5% at today’s meeting.  The also decided unanimously to maintain the stock of purchased assets financed by the issuance of central bank reserves at £375 billion.

The BoE noted that annual CPI inflation was 0.3% in May, well below the 2% inflation target.  “This shortfall is due predominantly to unusually large drags from energy and food prices, which are expected to attenuate over the next year.  Core inflation also remains subdued.”  

The BoE also warned about the effects of a Brexit on UK economy ahead of the June 23 referendum. “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.

“Sterling is also likely to depreciate further, perhaps sharply”, said the Bank.  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  and therefore the BoE 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.  The MPC will take whatever action is needed, following the outcome of the referendum, to ensure that inflation expectations remain well anchored and inflation returns to the target over the appropriate horizon.”