LONDON – The Bank of England is expected to keep interest rates on hold Thursday as it waits for the outcome of the stalled Brexit discussions between the British government and the European Union.
After the decision on the bank's main interest rate, which is currently at 0.75 percent, Governor Mark Carney will hold a news conference at which Brexit is likely to loom large.
Brexit has the potential to completely tear up the bank's economic projections — also due to be published Thursday — as well as the government's budget projections. That's why the central bank is likely to tread cautiously even though inflation is above the official target, which in theory would warrant higher rates.
"For the bank's immediate policy decision, near-term Brexit risks are likely to matter more than its expected medium-term outlook for growth and inflation," said Kallum Pickering, senior economist at Berenberg Bank.
The central bank's quarterly projections since the Brexit vote in June 2016 have been based on an assumption that the Brexit process would be smooth, that Britain's transition to a new trading relationship with the EU will be orderly. However, after 18 months of discussions, a deal has yet to be reached and fears are growing that one won't be reached given divergent views in particular on how to ensure a hard border does not return between EU member Ireland and Northern Ireland, which is part of the United Kingdom.
A summit of EU leaders held earlier this month was supposed to be the moment by which to reach a Brexit deal, to give parliaments time to pass it into law ahead of the March departure. Now, officials are talking about a summit in December as potentially the last chance to agree on a Brexit deal. By then, many Britain-based firms may have already activated contingency plans that could include transferring business to the continent and jobs cut.
This week, credit ratings agency Standard & Poor's warned that Britain faces the prospect of an immediate and prolonged recession, spiking unemployment and inflation if it crashes out of the EU with no deal on future relations and no transition period. Carney will likely face questions on what the central bank anticipates for the British economy in a scenario that would see legal and regulatory uncertainty, border delays and rising tariffs.
"Given the mounting uncertainty surrounding the negotiations, the bank's 'smooth Brexit' assumption is looking challenged," said James Smith, an economist at ING.