"Were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply."
The meeting focused on the upcoming EU Referendum, with the Committee stating that "were the UK to vote to leave the EU, sterling’s exchange rate would fall further, perhaps sharply".
Other predicted effects included "worsening terms of trade, lower productivity, and higher risk premia". The MPC added that UK short-term interest rates and measures of UK bank funding costs "appear to have been materially influenced by opinion polls about the referendum".
The Committee stated that the outcome of the referendum continues to be the "largest immediate risk facing UK financial markets, and possibly also global financial markets".
The US Federal Reserve cited a potential Brexit as a factor behind its decision not to raise interest rates today. Chair Janet Yellen said the decision "could have consequences for economic and financial conditions in global financial markets. If it does so it could have consequences in turn for the US economic outlook that would be a factor in deciding on the appropriate path of policy".
The MPC believes there is "growing evidence" that uncertainty about the referendum is leading to "delays to major economic decisions that are costly to reverse, including commercial and residential real estate transactions, car purchases, and business investment".
The Bank of England has admitted that the referendum is making "underlying economic momentum harder to interpret at present" and is currently reacting more cautiously to data than usual.
In its minutes, the MPC said it will take "whatever action is needed, following the outcome of the referendum, to ensure that inflation expectations remain well anchored and inflation returns to the target over the appropriate horizon".
This is likely to mean a Bank Rate cut in the case of a Brexit result. The MPC raised concerns that it would "face a trade-off between stabilising inflation on the one hand and output and employment on the other".
Andrew Wilson, head of investments at Towry, said: “Today’s interest rate decision comes as no great surprise as the very last thing the Monetary Policy Committee of the Bank of England would have done is choose to increase borrowing costs prior to the Referendum later this month. Indeed, they may even need to loosen policy further in the case of a Brexit result.
“The Bank is concerned that a Brexit could weaken the pound. On the one hand, this is just what the economy needs to improve the competitive position of the much-maligned manufacturing and export sectors. However, a serious and sustained fall in sterling could also be inflationary which might lead to pressure to tighten monetary policy."
Andrew McPhillips, Chief Economist at Yorkshire Building Society, agreed, stating: “It is likely that if the UK votes to leave the EU, the MPC will cut base rate in an attempt to stabilise the economy. Though this could lead to an increase in inflation due to the depreciation of Sterling, the Bank is likely to be willing to trade that off against trying to maintain economic growth and avoid the risk of increasing unemployment. That said, even if the base rate is cut, mortgage interest rates may increase. Lenders will need to ensure that they remain profitable as wholesale and retail funding becomes relatively more expensive. This is most easily achieved by increasing borrowing costs.
“Conversely, a vote to Remain would most likely mean that interest rates would increase further down the line at a gradual pace depending on future growth in inflation.“
