The Bank of England held rates today at 0.5% but issued a stern warning over Brexit and said pound could fall, ‘perhaps sharply’, if UK votes to leave EU.
In a statement it said: “As the Committee set out last month, 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. Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. Through financial market and confidence channels, there are also risks of adverse spill-overs to the global economy.
“At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. Sterling is also likely to depreciate further, perhaps sharply.
“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 than in the central projections set out in the May Inflation Report.
“In such circumstances, the MPC 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.”
Andrew McPhillips, chief economist at Yorkshire Building Society, said: “It is likely that if the UK votes to leave the EU, the MPC will cut base rate in an attempt to stabilise the economy. Though this could lead to an increase in inflation due to the depreciation of Sterling, the Bank is likely to be willing to trade that off against trying to maintain economic growth and avoid the risk of increasing unemployment.
“That said, even if the base rate is cut, mortgage interest rates may increase. Lenders will need to ensure that they remain profitable as wholesale and retail funding becomes relatively more expensive. This is most easily achieved by increasing borrowing costs.
“Conversely, a vote to Remain would most likely mean that interest rates would increase further down the line at a gradual pace depending on future growth in inflation.“