Anti-Brexit demonstrators wave flags outside the houses of Parliament in London, Wednesday Dec. 19, 2018. (AP Photo/Tim Ireland)

Bank of England warns of intensified Brexit uncertainties

December 20, 2018 - 9:15 am

LONDON (AP) — The Bank of England warned Thursday that uncertainties related to Brexit have "intensified considerably" since early November and weighing on the U.K. economy.

While unanimously deciding to keep the bank's main interest rate unchanged at 0.75 percent, as expected, the nine-member rate-setting panel noted a series of negative economic developments amid the Brexit impasse.

Britain is due to leave the EU on March 29 but Prime Minister Theresa May has been unable to get lawmakers to agree her Brexit deal and is delaying a vote on it until mid-January.

At the moment, it looks like her deal, which foresees close ties between Britain and the EU in the trade of goods, will struggle to get through parliament. What would happen then is extremely unclear and the great economic concern is that Britain could crash out of the EU without a deal and without a transition period that will smooth the process to new trading arrangements.

As well as noting a sharp fall in those U.K. stocks that primarily operate in the country and a further decline in the value of the pound, Bank of England policymakers said business investment was likely to remain weak and the housing market subdued.

"The further intensification of Brexit uncertainties, coupled with the slowing global economy, has also weighed on the near-term outlook for U.K. growth," the rate-setters said, according to minutes of their meeting on Wednesday.

Bank staff said the U.K. economy may only grow 0.2 percent in the fourth quarter from the previous three-month period, 0.1 percentage point lower than thought last month.

"The broader economic outlook will continue to depend significantly on the nature of EU withdrawal, in particular: the form of new trading arrangements between the European Union and the United Kingdom; whether the transition to them is abrupt or smooth; and how households, businesses and financial markets respond."

The British economy has slowed down since the country voted in June 2016 to leave the EU and many forecasters are warning of a potential recession if no Brexit deal is agreed.

Last month, the Bank of England said that in a worst-case scenario, the British economy could shrink by a massive 8 percent within months of the March 29 Brexit date and unemployment and inflation would spike.

In that "disorderly and disruptive" scenario, four decades of economic alignment would be reversed, with tariffs placed on exports and border checks reinstalled, and restrictions could hit travelers and workers. Shortages of medicines and food could also materialize. The British government is already stockpiling many resources and both Britain and the EU have this week ramped up their preparations for a potential no-deal outcome.

For many British businesses, especially those dependent on trading in the EU, the current stalemate in Parliament is worrying, and that helps explain why business investment has been so weak of late.

However, consumption has held out better and is currently being buoyed by decade-high increases in earnings and lower inflation. Figures Thursday showed that retail sales in November rose by 1.4 percent from the previous month, way ahead of expectations of a 0.3 percent increase.

The Bank of England said Thursday that further support to household spending could happen in the months to come as lower oil prices feeds through to lower inflation. It said that the annual rate of consumer price inflation, which was 2.3 percent in November, could fall below its target of 2 percent in January, to around 1.75 percent.

Brexit, though, looms large and analysts are skeptical about the prospect of consumers continuing to splash out if the uncertainty over Britain's future persists.

"The retail sector is facing a tough Christmas period as consumers grow more cautious," said James Smith, developed markets economist at ING.

"This negative sentiment could grow if individuals become more nervous about job security as the perceived risk of 'no-deal' rises, while at the very least, firms are likely to hold off on near-term hiring/investment decisions."

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