Brexit risks recession, warns Bank of England

Bank of England governor Mark Carney has warned a vote to leave the European Union (EU) could cause a recession in the UK. Carney said the risks of leaving "could possibly include a technical recession".

His comments were made at the same time the Monetary Policy Committee (MPC) sounded a stark warning about the implications a "Brexit" would have on the UK's economy.

The MPC noted a vote to leave the EU could "materially alter the outlook for output and inflation".

The committee expressed concerns households could defer consumption. The MPC also warned that firms could delay investment due to the uncertainty a "Brexit" would bring, which in turn would lower labour demand and cause unemployment to rise. Sterling is also likely to depreciate further, the MPC says.

No interest rate rise

With inflation at 0.5%, which remains stubbornly below the Bank's target rate of 2%, and stalling UK economic growth, there was no surprise interest rate rise on Thursday, with the MPC unanimously voting to keep interest rates at their record low.

In fact some commentators have cautioned the Bank of England are more likely to cut interest rates.

Maike Currie, investment director for personal investing at Fidelity International, says: "If economic conditions do not improve, speculation is rife that some members of the MPC may vote in favour of a rate cut in the not too distant future."

Neil Lovatt, product director at savings and ISA provider Scottish Friendly, agrees. He adds: "Mark Carney's view on the UK economy continues to be gloomy, pushing back any hope savers may have had for a rate rise.

"Indeed, such is the parlous state of the country's economy that discussions now seem to be centred on when interest rates will be cut, rather than when they will rise."

The idea behind negative rates is that it encourages banks to lend money more cheaply. This encourages savers to go out and spend, boosting economic growth and sending inflation higher.

But Currie argues that the opposite seems to be playing out: savers, unable to get the returns they need to prepare for retirement, are increasingly diverting money from spending into saving.

However, hoarding cash is exactly what central banks want to avoid.

Currie continues: "Meanwhile, the topsy-turvy 'Alice-in-Wonderland' world negative interest rates create chips away at banks' profit margins and distorts the bond market.

"But arguably the biggest problem with negative interest rates is the signal they send that central banks have run out of ideas."

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