On Thursday, the Bank of England is widely predicted to keep its main interest rate at 0.75% despite the gloomy economic backdrop. "The upcoming general election has added to the fog of political uncertainty already hanging over the U.K. economy because of Brexit," said Kallum Pickering, senior economist at Berenberg.
"With economic momentum subdued, and no immediate inflation risks to contend with, expect the bank's nine-member Monetary Policy Committee to keep policy on hold." Alongside its interest rate decision, the bank is also expected to lower its growth forecast for 2020 from its previous estimate of 1.3%, mainly due to concerns over Brexit.
Business investment has borne the brunt of Brexit uncertainty since the country voted in June 2016 to leave the European Union as executives have sought clarity over Britain's future trading relationship with the EU.
Prime Minister Boris Johnson called the election in the hope of securing a majority in Parliament that would allow him to push through the withdrawal agreement he negotiated with the EU by Jan. 31, Britain's new scheduled departure from the EU.
He says "getting Brexit done" will unleash pent-up investment, stoking growth. "Let's make 2020 the year of investment and growth," he said Wednesday outside his residence at No. 10 Downing Street as the general election formally got underway.
Bank of England Governor Mark Carney, who is due to step down early next year, has said that ratification of a Brexit deal would lead to a rebound in some investment. That would shore up growth and potentially lead to one or two quarter-point interest rate increases.
Not everyone is convinced, with Johnson's opponents arguing for alternative courses, from scrapping Brexit to another referendum on membership. They claim his Brexit deal will just lead to further acute uncertainty that will keep investment in check and potentially force the Bank of England to cut interest rates.
Michael Saunders, one of the nine members of the rate-setting panel, said in a speech in September that "persistently high uncertainty" could prompt the bank to lower rates. Though ratification of Johnson's deal soon after the election would pave the way for Britain to leave the EU by the end of January, attention would swiftly turn to the next stage of talks , on the future relationship between the EU and the U.K.
Under the terms of the withdrawal agreement, Britain will remain in the tariff-free European single market and customs union through 2020 even though it won't have a say in making the rules. That transition period can be extended once by one or two years, but that must be done by the end of June.
Few experts think a trade deal can be forged in a few months — it took Canada seven years to complete its deal with the EU. "This almost certainly won't be long enough," said ING economist James Smith.
As a result, Britain could end up leaving the EU's single market and customs union at the end of next year, which most economists think could lead to a recession in Britain as tariffs and other impediments to trade start to bite.
"This uncertainty will keep a lid on investment," said Smith. The fog of Brexit doesn't look likely to go away anytime soon.
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