Bank of England (BoE) expects the UK economy to grow less rapidly than previously expected, the central bank said on Thursday. The reason for the adjustment is, among other things, the uncertainty surrounding the British exit from the European Union, the Brexit. However, the bank did not interfere with the most important interest rate.
BoE expects an economic growth of 1.3 percent in 2019. In May the central bank assumed a growth of 1.5 percent. For next year, the British central bank is also counting on economic growth of 1.3 percent. Previously, the expectation was 1.6 percent.
The central bank believes that the UK economy will not grow in the current quarter, while the BoE in May still assumed growth of 0.2 percent. The central bank estimates a growth of 0.3 percent for the third quarter. The expected economic growth in the second and third quarter together would be the smallest growth since 2009.
The Brexit, scheduled for late October, could lead to a recession next year, the central bank warns. According to BoE, this applies to both a Brexit without an agreement and a withdrawal with an agreement.
Bank of England estimates Brexit with a deal
In the growth forecast, BoE did assume a Brexit with agreements with the EU, instead of a so-called 'no deal Brexit'. The chance of such a scenario appears to have increased in recent weeks. Under the leadership of the new British Prime Minister Boris Johnson, the British government has taken a harder line in which a scenario without agreements is shun less than under Theresa May.
If the UK leaves the EU without a deal, the central bank expects the value of the pound to fall sharply, inflation to rise and expected economic growth to be even lower.
Main interest rate remains unchanged
Despite the worsening economic climate and increased uncertainty, the central bank has not changed the main interest rate. The rate remains at 0.75 percent.
The British central bank still expects to raise interest rates slowly, but according to central bank president Mark Carney this depends on how the world economy is developing and how the Brexit is progressing.
On Wednesday, the American system of central banks, the Federal Reserve, lowered the main interest rate by 0.25 percentage point. The Fed did this because of the deteriorating economic climate.