Business

Bank of England cuts UK growth forecast

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The Bank of England has cut its forecasts for UK growth over the next two years.

It also warned that a no-deal Brexit would hit the economy and trigger a further drop in the value of the pound.

The Bank left interest rates unchanged at 0.75% against a backdrop of weaker global growth and ongoing trade tensions between the US and China.

It said the UK economy was expected to grow by 1.3% this year, down from a previous projection of 1.5% in May.

The Bank also cut its outlook for growth in 2020 to 1.3%, from a previous projection of 1.6%.

The forecasts are based on the assumption that the UK leaves the EU with a Brexit deal - however it suggested growth could be much slower in the event of no deal.

Why has the Bank cut its forecasts?

The Bank's Monetary Policy Committee (MPC) that sets interest rates said the UK was likely to have stagnated in the three months to June.

Its quarterly Inflation Report predicted only modest growth in the coming months due to ongoing uncertainty over the UK's future relationship with the European Union.

It said there was a one-in-three chance that the economy will shrink at the start of next year, with global trade tensions also weighing on the UK outlook.

And it said there had been a "material and broad-based slowdown" in world growth since the end of 2017.

There is a weather vane at the top of the Bank of England's centuries old HQ that used to provide some early indication of when the winds were appropriate for the arrival of trading ships on the Thames in the need of its funds.

So thick is the Brexit fog in their attempts to assess the path for the economy, that the vane may well offer more clarity.

The Bank's boffins have had to continue to assume that there will be a smooth Brexit, as that, officially, is the government's policy.

The Bank did not choose to outline the detailed implications of a no-deal Brexit.

Predicting the path of the economy through the political machinations of a possible no deal Brexit is akin to driving with an iced up windscreen and a broken sat-nav.

For now, the Bank has pulled up in a lay-by, got out of the car, and is awaiting a clearer indication of factors it cannot control.

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The Bank said the jobs market remained strong, although it also noted there were signs that the unemployment rate was likely to stay around the current rate of 3.8%.

What is the outlook for interest rates?

The MPC's forecasts for steady growth, inflation and employment are all based on the assumption of a smooth Brexit, in which the UK leaves with a deal.

It said that in this scenario it "would be appropriate" to raise interest rates to stop the economy from overheating.

However, it also spelled out the implications of a no-deal Brexit for the first time, stating that it would probably lead to slower growth, higher prices and a weaker pound.

The Bank has previously stated that it may not automatically cut interest rates in this scenario.

Policymakers have also warned that there are limits to the extent to which the MPC can stimulate the economy if the UK leaves the EU without a deal.

What did Mark Carney say about no-deal?

The Bank's governor Mark Carney said the UK would be smaller, weaker and poorer in the event of a no-deal Brexit.

"In the event of a no-deal, no transition Brexit, sterling would likely fall, the risk premiums on UK assets would rise and volatility would spike higher," he said.

Betting markets believe there is more than a one-in-three chance the UK will leave the EU without an agreement.

Mr Carney said uncertainty over the future relationship was weighing on economic growth and financial markets.

He also described comments by President Trump's former economic adviser that leaving the EU without a deal was better than the current impasse as "wrong".

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Image caption Governor Mark Carney has warned there are limits to the extent to which the Bank can help in the event of no deal

Gary Cohn told the BBC on Wednesday that a no-deal Brexit would be better than a period of prolonged uncertainty.

But Mr Carney said: "No deal as a crystallisation of a bad economic outcome is not preferable to the possibility of a better economic outcome.

"Whatever outcome the country chooses it is always preferable to have a transition to it. That is consistent with the preferences, the aims of this government, and consistent certainly with the aims of businesses up and down the country."

He added that "vital" preparations by business for no deal would not "eliminate the fundamental economic adjustments to a new trading arrangement that a no-deal Brexit would entail".

How is Brexit affecting business?

The Bank said UK economic growth was "likely to remain subdued over the coming year, with Brexit-related uncertainties weighing on spending to a greater extent than in May".

Its latest survey of businesses showed that 90% of them had implemented contingency plans ahead of a previous March Brexit deadline.

Three quarters of respondents said they were also "as ready as they can be" for a no-deal scenario.

However, the Bank warned that "material risks of economic disruption remain".

It noted that 240,000 businesses that currently trade solely with the EU were not ready for sudden EU border inspections in the event of no deal.

Many others did not have the right documents to keep selling to the EU if the UK left the bloc without a deal.

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