Brexit could hit UK growth and make pound plunge, warns Bank of England

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The Bank of England has said a vote to leave the EU could "materially" hit UK growth and cause the pound to plunge in its strongest warning yet over the impact of a Brexit.

In its latest quarterly inflation report, the Bank revealed fears that a vote for the UK to leave the European Union would see sterling fall "sharply", causing inflation to spike higher, while the economy would suffer as households and businesses reined in spending.

It added that borrowers could face higher interest rates as bank funding costs increased.

This could have a knock-on effect on house prices, while employment could also suffer as firms put recruitment on hold, the Bank said.

The stark warning came as the Bank slashed its growth outlook for the next three years and kept interest rates on hold at 0.5%, where they have been since March 2009.

Forecasts in the report were based on a vote to remain in the EU, but showed that uncertainty ahead of next month's referendum was expected to see gross domestic product (GDP) slow to 0.3% in the second quarter from 0.5% in the first three months of 2016.

Even if Britain stayed in the EU, growth would be slow to recover as uncertainty unwound, while low productivity and household spending is also set to weigh on the economy, according to the Bank.

It cut its UK growth forecasts to 2% in 2016, 2.3% in 2017 and 2.3% in 2018.

This is down from February's forecasts for growth of 2.2% in 2016, 2.4% in 2017 and 2.5% in 2018.

In an open letter to Chancellor George Osborne explaining why inflation remained below target, Bank governor Mark Carney said a Brexit vote would "lower growth materially and raise the rate of inflation notably".

Sterling has already dropped by 9% since its recent peak in November and the Bank estimated around half of this was due to referendum uncertainty.

A Brexit would see the pound tumble further, according to the Monetary Policy Committee (MPC).

It said: "In the face of greater uncertainty about the UK's trading relationships, sterling would likely depreciate further, perhaps sharply."

The inflation report added that "any such fall in UK financial asset prices would tend to raise funding costs for banks and therefore interest rates on UK household and corporate borrowing".

The MPC said it would "take whatever action was needed" after the referendum.

But it admitted that, in the event of a Brexit, it would face a difficult "trade-off" between bringing inflation down and supporting growth.

Mr Osborne told MPs on Wednesday that the Bank and Treasury were doing a "serious amount" of contingency planning for a Brexit vote.

All nine members of the MPC voted to keep rates on hold again this month despite mounting speculation over a rate cut to boost flagging growth.

The minutes showed the Bank stuck to its forecast of a "gentle rise" in rates over the next two years, although the report - which is based on a Remain vote - signalled that a hike may not come until 2018.

It believes inflation would ease back briefly in April, from 0.5% in March.

The inflation report also showed that the soft drinks levy, due to come into effect in 2018, would increase annual inflation by 0.1 percentage points.