BoE surprisingly vocal about Brexit risk for the UK economy - Rabobank

Bas van Geffen, Quantitative Analyst at Rabobank, notes that the equities were thrown a curve ball by the Bank of England, which was surprisingly vocal about Brexit risk for the UK economy.

Key Quotes

“In his accompanying remarks Governor Carney did not shy away from the “elephant in the room”, as he referred to the EU referendum, calling it the most significant risk to the BoE’s forecast. The BoE’s language when referring to Brexit was actually quite stark. The outspokenness of the Bank could re-emphasise the potential risks for the pound in the eyes of investors, which means that if polls continue to show a neck and neck race between the Leave and Remain camps the downside to sterling could pick up in the run up to the vote.

In the short-term, Carney admitted that signs that the EU referendum is starting to weigh on activity also make it harder to interpret UK macroeconomic and financial indicators. This is has caused the MPC to “[react] more cautiously to data releases than normally would be the case.”

Looking forward to the potential outcomes of the referendum, the impact of a Brexit vote on the base rate is not clear-cut. As Carney noted, a vote to leave the EU could lead to a further, potentially sharp, fall in the sterling, while also reducing aggregate demand and (over a longer horizon) supply. “[This] combination of these 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 other words, the outcome for monetary policy in such a scenario is not a given: the MPC may have to choose between stabilising economic growth (i.e. further easing), or stabilising inflation (i.e. raising rates).”