No-deal Brexit would hit pound sterling, warns Bank of England

‘In the event that trade negotiations did not reach an agreement the exchange rate would probably fall,’ say minutes of the Monetary Policy Committee’s December meeting

The Bank estimates border disruption will knock 1 per cent of UK GDP growth in the first quarter of 2021 (REUTERS)

A no-deal Brexit would likely hit the pound and damage the economy, the Bank of England’s interest rate setters have warned in their final scheduled meeting before the deadline for the end of the transition period.

The warning comes as hopes rise that the UK government will be able to agree a free trade deal with the EU ahead of 31 December, when the UK, by law, departs the single market and the customs union.

“In the event that those trade negotiations did not reach an agreement, the exchange rate would probably fall and, relative to the projections in the November Report, CPI inflation would be likely to be higher and GDP growth weaker,” said the minutes of the Monetary Policy Committee’s December meeting, released on Thursday.

Sterling has been rising against the dollar in recent days as market expectations have grown of an imminent deal, with the currency hitting $1.3623 on thursday morning, the highest level since May 2018.

The MPC, as expected, held interest rates at a record low of 0.1 per cent on Thursday and did not add further to its £895bn money printing programme.

But it stressed that the outlook for the UK economy was “unusually uncertain” because of the twin factors of Brexit and the Covid crisis.

Evidence from the Bank’s network of regional agents showed that 30 per cent of firms that trade with the EU are not prepared for the change in rules that are arriving on 31 December even if there is a deal.

The Bank estimates border disruption will knock 1 per cent of UK GDP growth in the first quarter of 2021, even if there is a successful free trade deal.

The MPC minutes also strongly suggested that the Bank would ease monetary policy further if there was no deal reached, stating that: “Compared with previous periods during which non-negotiated Brexit outcomes had been possible, the economy was starting from a weaker position with greater spare capacity, increasing the Committee’s tolerance for a temporary overshoot in inflation.”

It remains uncertain, however, whether the Bank would ease policy by cutting interest rates into negative territory for the first time, or simply step up its money printing.

“The Bank of England won’t make its next move until it knows which way Brexit is heading," said Laith Khalaf of the online trading platform AJ Bell.

“In the event of no-deal, it would likely be willing to look through the temporary jump in inflation as a result of weaker sterling and the imposition of tariffs, but it couldn’t turn a blind eye to the economic impact of a disorderly Brexit.”