Britain could face recession, BoE to ease policy: Reuters poll

June 24, 2016 09:20 AM

Britain's decision to leave the European Union could drive the economy into recession and will force the Bank of England to ease its already ultra-loose monetary policy further, a Reuters poll of economists found on Friday.

Global financial markets plunged and sterling sank to its lowest since 1985 after Britons voted by nearly 52-48% on Thursday to break away from the world's biggest trading bloc.

According to 70 economists and strategists polled by Reuters on Friday, sterling will fall further and there is a median 53% chance of a British recession. Gross domestic product would flatline in the second half, they said.

Before the referendum they had predicted 0.5% growth in both quarters.

"The vote to leave the EU has clearly weakened the near-term outlook for the UK economy," said Jonathan Loynes at Capital Economics.

Bank of England Governor Mark Carney said the BoE would consider in the coming weeks whether to take additional policy responses but it has little room to ease.

Over seven years ago, in the depths of the financial crisis, the Monetary Policy Committee cut Bank Rate to a record low 0.5% and embarked on a 375 billion pound quantitative easing program. A Reuters poll published earlier this month suggested the first rise would come in early 2017.

But in Friday's poll, 19 economists said the MPC's next move would be to cut Bank Rate, five said it would top up its asset purchase program and 21 said there would be a combination of both. Not one expected a tightening of policy.

"Given the current very low rate of headline inflation and muted inflation expectations, we expect the BoE to cut interest rates towards zero (but not below zero) fairly swiftly to support economic activity," said Daniel Vernazza at UniCredit.

"The MPC could also restart asset purchases if UK financial conditions tighten severely."

The leave vote hammered sterling which plunged to its weakest level against the dollar in 31 years, before recovering slightly. It was still down 8% by mid-morning in London.

Foreign exchange strategists predicted more pain ahead.

The consensus from Friday's poll was that sterling could fall to as low as $1.28 in the next three months, almost 7% weaker than its current exchange rate of around $1.37.

By the end of this month, sterling will weaken to $1.34, analysts predicted, then fall further to $1.30 by end-July. It is seen holding at that level at the end of September -- the lowest median consensus in over 20 years of Reuters polls on the British pound.

With a weaker pound driving up the cost of imports, inflation could peak at 3 percent in the next two years, above the Bank's 2% target, the poll found, making it harder for the MPC to balance its desire to support growth while controlling price rises.

"The Bank of England MPC will choose to look through the overshoot in CPI from the UK's decision to leave the EU. It will instead lean against elevated uncertainty and financial market volatility with further monetary policy easing," said economists at Barclays in a note to clients.


As well as hitting the economy, the vote could lead to a break up of the United Kingdom. 

Scotland is highly likely to hold a second independence referendum, Scottish First Minister Nicola Sturgeon said on Friday, something 48 of 51 respondents polled agreed with. Scots rejected independence in a referendum almost two years ago because it would have meant leaving the EU too.

"The UK's vote to leave may lead to calls for another Scottish referendum," said Simon Wells, chief UK economist at HSBC.




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