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EU referendum is the big known unknown for Bank of England

Ian Kernohan, Economist

12 May 2016

The most eye catching parts of the Bank of England's (BoE) Inflation Report are the comments on the forthcoming EU referendum.

The report has a markedly negative tone to the likely economic impact of a vote to leave the EU, centred around a deterioration in the growth/inflation trade-off.  The Bank’s base case is for the UK to vote to remain in the EU, and on that assumption, the Monetary Policy Committee (MPC) is still signalling the next move in interest rates will be up, therefore markets’ interest rate expectations are too low. 

The downgrades to growth forecasts have not fed through into a weaker inflation forecast. Inflation is still projected to be above its target in the medium-term, taking on board current market interest rate expectations that rates remain unchanged for the next three years.  There has been little reaction to this news across markets; investors know that as far as the BoE’s policy is concerned, the outcome of the referendum remains the big ‘known unknown’.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.