The Bank of England kept its key interest rate at a record low of 0.5% on Thursday and made no changes to its 375-billion-pound ($540.06 billion) asset purchase program. In a unanimous vote, the Monetary Policy Committee decided not to make any changes before a June 23 referendum in the U.K. on whether the country should stay or exit the European Union. Meanwhile, it cut its growth forecasts, pointing to subdued inflation.
According to policy makers, "The most significant risks to the [bank's] forecast concern the referendum. A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy."
Recession Possible
In its quarterly Inflation Report, the BOE gave a detailed assessment of the risks surrounding a Brexit, claiming that it could lead to a prolonged period of uncertainty, hurt capital inflows, raise risk potential, increase bank funding costs and threaten financial stability.
Mark Carney, BOE governor told the press that “A vote to leave the EU could have material effects on the exchange rate, demand and supply potential.” The consequences “could possibly include a technical recession.”
Most economists in England oppose a U.K. exit and are backing up Carney’s stance. There is, however, a campaign organized by the Vote Leave group that is pushing for a withdrawal from the EU. Former Chancellor Norman Lamont said Carney “should be careful that he doesn’t cause a crisis.”
The pound GBPUSD, -0.0623% traded at $1.4479, compared with $1.4447 before the policy decision was announced.