The Bank of England has risked accusations of intervening in the election campaign as it published its first formal forecast of the impact of Boris Johnson’s Brexit deal.
In its Monetary Policy Report, the Bank forecast that over the course of the next three years the Conservative government’s deal could leave the economy slightly weaker than it previously forecast.
However the Bank added that there would be a near-term boost as uncertainty lifted and companies and households invested more.
The Bank had previously stopped short of incorporating Theresa May’s deal into its economic forecasts, choosing instead to forecast on the basis of a range of probabilities over a Brexit deal.
But today it said it was now forecasting on the basis of Mr Johnson’s recently-negotiated deal with Brussels, which passed its second reading in the House of Commons.
The upshot, it said, was that it was now forecasting that uncertainty would lift in the near term but that the deal, which implied customs checks and regulatory divergence with European trading partners, would then come to weigh on the economy.
While it is unclear whether the Bank thinks that in the longer run the deal would leave the economy weaker than under other versions of Brexit, the Governor, Mark Carney, had previously indicated that were Mrs May’s deal to be ratified that would likely have prompted an upgrade to its forecasts.
The scale of the downgrade, accounting for only a few decimal points of the overall 1 percentage point cut in the three-year growth forecast since August, is relatively small, but the intervention is nonetheless likely to prove controversial, coming as it did hours after the Office for Budget Responsibility was forced to cancel the publication of updated numbers on the public finances for fear of intruding into the election campaign.
While that publication was expected to be relatively anodyne, the Bank’s forecast today is likely to attract more attention, especially since it comes during the “purdah” period when public bodies typically maintain a low profile.
The Brexit-related changes are not the biggest factor pushing down growth over the three year period. The majority of the impact is down to changes in the world economic outlook and in asset prices. Nor does the forecast imply a UK recession.
The Bank was previously forecasting growth of 1.3% this year and in today’s today’s forecast it raised that number to 1.4%.
However, it cut its 2020 forecast from 1.3% to 1.2% and its 2021 forecast from 2.3% to 1.8%.
The Bank characterised the cuts as relatively small, and pointed out that August’s report was not a very good comparison, since asset prices had shifted significantly and its previous Brexit assumptions had been based on changes to trade happening over a long 15 year period.
They are now assumed to kick in within a few years.
The Bank also pointed out that the spending round boost to public spending would also lift GDP growth in the coming years by around 0.4 percentage points and would push inflation higher.
The Monetary Policy Committee left interest rates and quantitative easing unchanged, but the chances of a cut have increased because two members of the committee – Michael Saunders and Jonathan Haskell – voted in favour of a rate cut from 0.75% to 0.5%.