Uncertainty surrounding a no-deal Brexit continues to drag down the UK economy

The Bank of England has warned today that it believes Britain has a one in three chance of falling into a recession, as growing fears and uncertainty over Brexit continue to pull down the economy.

The Bank’s Monetary Policy Committee (MPC) voted to leave interest rates on hold at 0.75%.

The pound has faced a week of non-stop blows, made worse by the quarterly inflation report announcing a 33% probability of negative growth by the start of next year. 

Predictions for GDP in the second quarter don’t look too promising, as Threadneedle Street penciled in zero growth – all before Britain departs from the European Union.

Prime Minister Boris Johnson seems to believe he can drag Britain out of the European Union without a deal in place within 100 days, which helps to explain why the pound has stumbled.

In fact, since Boris Johnson’s ascent to Prime Minister, the pound has plunged to a low of 1.2085 GBP, its weakest since January 2017. 

Sterling was last down 0.4% at $1.2111, while against the euro it was unchanged at 91.055 pence EURGBP.

The pound is recorded as the worst performance of any major currency in the world during July – a move that has spooked investors that Britain is on its way to an ugly withdrawal from the European Union, after 46 years in the world’s largest trading bloc.

Despite the negativity surrounding Britain’s economy, the Bank of England believes Britain can reach a deal with Brussels. If a deal is made, interest rates will rise to combat increasing inflation over the next three years. 

However, should Britain crash out without a deal, the Bank has made it clear that the pound will most likely tumble, inflation will rise, and GDP growth will slow further.

The Bank of England said:

Assuming a smooth Brexit and a recovery in global growth, a significant margin of excess demand was likely to build.

Were that to occur, the MPC judged that increases in interest rates, at a gradual pace and to a limited extent, would be appropriate.

On the Bank of England’s trade-weighted GBPTWI=BOEL index, which measures the cable against its trading partners’ currencies, the currency has dropped to its weakest since early November 2016, having fallen more than 7% since early May.

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Dalia Hilmi
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