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The Bank Of England Warns Against Brexit

Brexit

Image source: mikecphoto / Shutterstock.com

What's going on?

Britain’s central bank, the Bank of England (BoE), gave its starkest warning yet on the economic risks of a Brexit: it says to get ready for a significantly lower pound, job losses and, possibly, a shrinking overall economy.

What does this mean?

We’ve reported before that the uncertainty associated with the June 23rd Brexit vote appears to be hurting Britain’s economy right now. But today’s comments from the Bank focus on what would happen if Britain actually votes to leave the EU: it outlined the risks in a fair amount of detail and made pretty clear that it thought it would be a negative for economic growth in the coming years (you can see the report here – the relevant section begins on page 41).

Why should I care?

For you personally: The value of the pound will probably be impacted in a big way by the Brexit vote. If Britain votes to leave the EU, it’s likely that the pound will decline in value. One reason (arguably) is that there will be fewer foreigners investing in Britain, and therefore there will be less demand for the pound, which pushes down its price. Sometimes a weaker currency can be good for an economy (it can make it easier to sell goods abroad), but it also usually makes things more expensive for people living in the country, e.g. the cost of imported food goes up.

The bigger picture: Some are saying that the Bank of England should stay out of the debate. Central banks have their independence enshrined by law. This is usually to avoid government meddling (i.e. the Prime Minister demanding the Bank to stimulate the economy so that he/she can get re-elected). But the tradeoff is that the central bank is supposed to remain politically independent. Arguably, the Bank is simply doing its job by forecasting the impact of a potential economic risk – but those campaigning to leave the EU feel differently.

Originally posted as part of the Finimize daily email.

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