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Bank of England: ‘No deal’ Brexit could lead to economic collapse

The Bank warns that inflation, interest rates and unemployment would rise with a “disorderly” Brexit.

The Bank of England says that a disorderly Brexit could push the UK towards the biggest slump in modern memory.

It says that a disorderly Brexit, involving no new trade deals, severe disruption at borders and uncertain economic conditions, could lead to the British economy shrinking by nearly 8% – more than the effect of the financial crisis.

In an 88-page document, the bank also claims that a disorderly Brexit could lead to house prices falling by 30%, unemployment nearly doubling and inflation spiralling to 6.5%.

Under those circumstances, the interest rate could rocket to 5.5%, it adds.

In such a scenario, the value of the pound could plummet to parity with the dollar and, after years of people coming to live and work in Britain, migration would actually turn negative – with 100,000 people leaving the country.

The report says it would lead to “a very severe disruption to trade” thanks to disruption at the border that “is assumed to be unable to cope smoothly with new customs requirements”.

The report was drawn up by the bank in response to a request from Nicky Morgan, chair of the Treasury select committee.

It is at pains to say that it presents scenarios, not forecasts – “what could happen, not necessarily what is most likely to happen”.

The report also includes more optimistic forecasts, based on the prospect of an orderly Brexit deal with a transition agreement.

Under one of these, which involves the UK retaining close ties with the European Union, the bank believes that GDP could grow faster than its most recent prediction.

But attention is bound to be focused on its most pessimistic scenario, of a disorderly Brexit that involves an acrimonious relationship with the EU.

It is the starkest warning yet by the bank of the financial impact of a particularly severe no deal Brexit, which it describes as the “worst case scenario”.

It would see the UK’s financial activity plummet by around 7% in the aftermath of a disorderly Brexit, fall a further 1% before the end of 2019, and then slowly recover in the following years.

In this scenario, it would take until the end of 2023 for the UK economy to get back to where it was at the time of Brexit.

The bank is likely to face renewed claims that it is too pessimistic in its assessment of the effects of Brexit, an allegation that Governor Mark Carney has repeatedly denied.

While highlighting its concern, the bank also reported that the UK’s financial system could cope with the sort of “severe economic shock” caused by a disruptive Brexit.

Its financial stability report concluded that all of the UK’s major banks had passed so-called stress tests designed to assess their ability to weather a major financial crisis.

It said that they had massively increased their resilience since the financial crisis a decade ago, with bigger capital reserves.

The bank’s report comes on the same day that a cross-departmental government report concluded that a no deal Brexit could mean the UK economy growing by 9.3% less over the coming 15 years, compared to staying in the EU.

The bank’s analysis, like that from the government, does not provide any predictions about the economic impact of the withdrawal agreement that is presently making its way through parliament.

A meaningful vote on it will be held on 11 December.

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