Brexit is causing the United Kingdom economy to weaken, it said, cutting its 2019 growth forecast to just 1.2%, the lowest since the financial crisis.
The Bank of England on Thursday (Feb 7) slashed its forecast for United Kingdom growth this year to 1.2 per cent from 1.7 per cent, blaming the downgrade on a global economic slowdown and "the fog of Brexit".
With Brexit hanging over the outlook, the bank said that its forecasts would need to be updated "once greater clarity emerged about the nature of European Union withdrawal".
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"Given the dynamics of the negotiations, we are now assuming uncertainty remains elevated for a while and that financial conditions stay tighter for longer", he said in a press briefing after the bank's nine-member policy committee kept its main interest rate at 0.75 per cent. The Government's regulations, as already enacted, are weakening the impact of the monetary policy, the central bank warned.
Sterling dropped around 0.4 per cent immediately after the bank's cut growth forecasts, sliding to $1.286.
Some economists also felt that there was a danger that a largely independent central bank could come under government pressure - providing too much stimulus for the economy after last week's budget handouts.
He added: "If and when we do leave, an orderly Brexit could see the Bank refocus on wage growth and raise rates later this year, though markets now price this as a 50/50 chance".
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The BoE saw a fall this year in business investment and housebuilding, which have been weak in the run-up to Brexit, as well as a halving of the growth rate in exports, reflecting the global slowdown. Nevertheless, the forecasts suggested that just one more quarter-point hike would be needed in the next three years to return inflation to close to the 2 percent target, down from nearly three hikes seen in November.
But it said the hit was expected to be "prove only temporary", with a recovery in expansion later in 2019 - though this is based on a Brexit deal being reached by March 29.
2019 GDP forecast revised lower at 1.2% against 1.7% previously.
Economist James Smith at ING said: "The Bank is highly unlikely to tighten policy again through the first half of this year, and indeed the chances of a rate hike at all in 2019 have receded - although we think it's too early to write one off completely". However, inflation dropping to a 18-month low of 2.19% in December appears to have prompted the MPC to go in for a cut.
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