LONDON (AP) — The Bank of England warned Thursday that Britain could suffer an economic shock if it crashes out of the European Union without a deal, saying it could cause another big fall in the value of the pound, potential gridlock at ports and even interest rate increases.
After keeping its main interest rate on hold at 0.75 percent, as expected, the central bank said Britain's economic output could "fall sharply" if the country fails to reach a deal with the EU on future relations after Brexit day in March.
"An abrupt and disorderly withdrawal could result in delays at borders, disruptions to supply chains, and more rapid and costly shifts in patterns of production, severely impairing the productive capacities of U.K. businesses," the bank said in economic projections that accompanied the unanimous rate decision by the nine-member Monetary Policy Committee.
In perhaps its most detailed analysis yet of the potential consequences of a no-deal Brexit, the bank also warned that the pound would likely to fall further in case of a "disruptive" withdrawal from the EU, which would "tend to increase inflation."
Since Britain voted to leave the EU in June 2016, the central bank has been operating on the assumption that Britain would achieve an orderly transition to a new trading relationship with the EU.
The bank's assumption is that Britain will not ultimately have the same close access to EU markets as it does now. But it also does not assume that tariffs would be imposed on a wide array of exports. It's predicting something in between.
After 18 months of discussions, a Brexit deal has yet to be reached and fears are growing that one may not be clinched 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 in October 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 for a deal. By then, many Britain-based firms may have already activated contingency plans that could include transferring business to the continent and job cuts.
One clear impact of Brexit uncertainty has been a decline in business investment. In a survey, the Bank of England found that more than 50 percent of firms identified Brexit as being one of the top three sources of uncertainty in September and October, up around 10 percentage points from August.
The bank said there has been little evidence of significant precautionary stock-building ahead of Brexit, though it said it's possible that could occur over the rest of this year and early next if concerns about Brexit persist.
The bank said it was not clear whether it would be more likely to raise or cut interest rates in the wake of a disorderly Brexit.
But economists say the bank, which has raised its key rate twice over the past year, would likely opt to slash borrowing costs as much as possible, possibly taking the benchmark rate down to zero and even using new stimulus methods, such as purchases of corporate bonds.
If the Brexit transition goes smoothly, the central bank is predicting a pick-up in business investment next year as executives put into action plans that had been suspended.
That would help growth to rise to around 1.75 percent a year on average over the coming three years. Under this scenario, interest rates would rise by a quarter percentage point per year over the period.
But, echoing comments by the Treasury chief this week, the central bank said it would have to revisit its forecasts in the event of a no-deal Brexit.
"The outlook for growth, employment and inflation depends significantly on the nature of the EU withdrawal," it said.