Brexit uncertainty has ‘intensified considerably’, Bank of England warns

The central bank said these uncertainties are ‘weighing on UK financial markets’, citing the recent fall in sterling and a rise in volatility

The Bank of England has warned that Brexit uncertainty has “intensified considerably” in recent months, as the prospect of a no-deal Brexit has loomed larger due to the deadlock in parliament.

The central bank’s Monetary Policy Committee (MPC) voted unanimously, as expected, to keep interest rates on hold at 0.75 per cent on Thursday.

But the minutes of the MPC’s latest meeting stressed that “Brexit uncertainties have intensified considerably since the committee’s last meeting”.

The BoE added that these uncertainties are “weighing on UK financial markets”, citing the recent fall in sterling, stock markets and a rise in volatility.

The central bank remarked that business investment has fallen for three successive quarters and said that the evidence from its network of regional agents suggests it is likely to remain weak in the near term.

The minutes also showed that the Bank has lowered its forecast for UK GDP growth in the final quarter of 2018 to 0.2 per cent from 0.3 per cent previously. It said the first quarter of 2019 was likely to be similarly weak.

The Bank raised interest rates in August, citing rising underlying inflationary pressure in the UK economy.

It has indicated that rates are likely to rise again next year provided there is a smooth Brexit.

And it noted that wages in the UK are now rising faster than it previously expected.

But the Bank has also warned that rates could go up more sharply in the event of the UK crashing out of the European Union without a deal since that is likely to damage the UK’s long-term supply capacity.

“The Bank continued to hint that it could conceivably raise interest rates to curb inflation in the event of a no-deal Brexit,” said Paul Dales of Capital Economics. “But we and the markets believe it’s bluffing. To limit the temporary fallout to the economy, the Bank would surely cut rates swiftly.”

Last month the Bank unveiled worst-case Brexit scenarios for the purposes of stress testing UK banks, which modelled an 8 per cent short-term collapse of GDP, with interest rates spiking to 5.5 per cent, in the wake of no deal.