Bank of England says Brexit and the uncertainty around it has already hit people’s incomes and is weighing down the economy. Households have cut back on spending and businesses on investment, slowing the economy’s growth.
It comes as the Bank downgraded its forecasts for the British economy this year, just days after EU statistics indicated the eurozone is growing at twice the rate of the British economy. The Bank’s Monetary Policy Committee also voted to keep interest rates at record low.
The UK economy is beginning the process of adjusting to a new and as of yet uncertain economic relationship with the European Union. Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU. It can influence how this hit to incomes is distributed between job losses and price rises, and it can support UK households and businesses as they adjust to such profound change.
There has been on-going uncertainty over the Government’s preferred approach to what kind of transitional arrangements there will be between leaving the EU in March 2019 and beginning a new trading relationship with the bloc.
Financial markets particularly sterling marked down the UK’s relative prospects quickly and sharply. Households looked through Brexit related uncertainties initially, but more recently as the consequences of sterling’s fall have shown up in the shops and squeezed their real incomes they have cut back on spending, slowing the economy. Businesses have been somewhere in between, but since the referendum they have invested much less aggressively than usual in response to an otherwise very favourable environment.
In the MPC forecast, uncertainty about the eventual shape of the UK’s economic relationship with the EU weighs in the decision of businesses and households and pulls down both demand and supply.
The Bank confirmed that it now expects the economy to grow by 1.7 per cent this year, down from a previous forecast of 1.9 per cent. Growth is now tipped to slow to 1.6 per cent in 2018, down from a previous forecast of 1.7 per cent. Eurostat’s “flash” estimate showed on Tuesday that the eurozone’s GDP grew at twice the rate of the UK’s in the second quarter of 2017. Growth in the 19-member single currency bloc was 0.6 per cent, double the 0.3 per cent estimate for the UK from the Office for National Statistics last week.
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