Bank of England warns pound set to plunge under No Deal Brexit

The Bank of England today slashed its forecasts for economic growth and warned that a no-deal Brexit could trigger a further fall in the value of the pound.

In its August inflation report, the bank cuts its official projection for GDP growth this year from 1.5 per cent to 1.3 per cent and for 2020 from 1.6 per cent to 1.3 per cent.

The report also revealed that the economy came to a grinding halt in the spring quarter as nervous companies, particularly major car-makers, braced for the original Brexit date of March 29. 

The bank expects a modest recovery to 0.2 per cent in the third quarter of the year.

The forecast came as the pound sank to $1.2085 against the dollar, the weakest since January 2017, and traded near to year lows against the euro, slashing the spending power of millions of British holidaymakers heading abroad.

The bank said it was still basing its forecasts on the assumption that Boris Johnson will agree a Brexit deal with Brussels in time for the Halloween deadline.

However, the bank’s rate-setting Monetary Policy Committee, chaired by bank governor Mark Carney, acknowledged that “in the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow”.

The MPC unanimously agreed to leave the bank’s interest rate at 0.75 per cent and said that future rate moves “could be in either direction”.

The inflation report said that Britain’s economic growth was being held back by trade tensions between China and the US, as well as the uncertainty over the outcome of Brexit talks.

The report warned: “Looking through recent volatility, underlying growth appears to have slowed since 2018 to a rate below potential, reflecting both the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on net trade.” Even with a deal, there is now a 30 per cent risk of the economy going into reverse next year, according to the report. That is the bank’s “most negative” assessment of the risk of recession since its August 2016 inflation report, immediately after the EU referendum.

Sterling has fallen almost six per cent against major currencies since the bank’s last report in May.

The bank said it expected a recovery in investment and GDP once Brexit “uncertainties dissipate”. It has upgraded its forecast from growth for 2021 from 2.1 per cent to 2.3 per cent.

In another development today, the  spending watchdog became the second body to say it will investigate the Government’s cash spree on no-deal preparations.

The National Audit Office will examine what projects ministers spend the money on and the “quality of the information” that Whitehall has on the expenditure.

The Standard revealed yesterday that Parliament’s spending watchdog, the Commons Public Accounts Committee, is to carry out a similar probe.