' Fog of Brexit increasing recession chance': Bank of England

RBI cuts repo rate in first policy review under new governor

With Brexit uncertainty wreaking havoc on the economy, that will be the lowest annual rate of growth since 2009.

Carney said "not everything may be tied up in a nice package" by Brexit day.

Reflecting the uncertainties that have "intensified over the past three months", the Bank downgraded its forecast for business investment this year to a decline of 2.75 per cent from growth of 2 per cent in November.

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.

"Although many companies are stepping up their contingency planning, the economy as a whole is still not yet prepared for a no-deal, no-transition exit".

This is being driven by sharp falls in business investment, as well as a drop in consumer spending and signs of a weaker United Kingdom housing market.

The MPC also trimmed its economic growth forecast, to 7.2-7.4 percent during April-September, from its previous 7.5 percent estimate. It was not doom and gloom: Carney said that a no-deal Brexit is not the most likely scenario and that the market should not prepare for further rate hikes, either for rate cuts.

The weaker growth outlook came even as the Bank acknowledged that investors have scaled back their expectations on how much interest rates are likely to rise, a key factor underpinning its own projections.

The bank's Quarterly Inflation report, released on Thursday, warned that Brexit was having a clear negative impact on the United Kingdom economy, saying that since the last Inflation Report, in November: "The further intensification of Brexit uncertainties, coupled with the slowing global economy, had weighed on the near-term outlook for United Kingdom growth".

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At the end of a year ago, the BoE warned a no-deal Brexit and a sudden loss of confidence among foreign investors could hammer the economy more than the global fianncial crisis did. Consumer inflation was an 18-month low of 2.19 percent, well below the RBI's medium-term 4 percent target.

The BoE kept its wage forecasts largely unchanged with earnings rising by more than 3 percent a year over the next three years.

But the bigger picture remains weak.

The bank said that productivity is recovering more slowly than it had thought and that the supply capacity of the economy had shrunk.

"RBI's decision to reduce the repo rate and changing its stance to neutral are highly positive changes to boost the sentiment of consumers and home loans".

The BOE is the latest central bank to take a downbeat turn this year, after recent dovish statements from the U.S. Federal Reserve and European Central Bank.

Banks have always been reluctant to reduce interest rates whenever there is a rate cut by the RBI. German industrial production data published on Thursday raised fears that Europe's biggest economy might be heading for a recession. The Federal Reserve has changed direction, and now many analysts expect no United States rate hikes this year, after four in 2018.

But financial markets - factoring in the chance of a no-deal Brexit - see only slightly more than a 50 percent chance of an increase.

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