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The Bank of England has warned that the government’s Brexit deal will drag down growth over the next three years as extra trade barriers raise costs.
It came as two Bank policymakers called for an immediate interest rate cut to support the economy.
The Bank voted 7-2 to keep interest rates on hold at 0.75%.
Policymakers said weaker global growth and ongoing uncertainty over Brexit would continue to weigh on the UK economy.
The Bank said the new EU withdrawal agreement struck by Prime Minister Boris Johnson had reduced the likelihood of a no-deal Brexit.
The Monetary Policy Committee (MPC) that sets interest rates said this would end some of the uncertainty facing businesses and households.
However, policymakers added that the transition to a new trade deal would introduce new customs checks and regulatory barriers.
The MPC said its assumption of a Canada-style “deep free-trade agreement” between the UK and EU would “raise administrative costs for firms” doing business with the continent.
What’s the outlook for growth?
The Bank expects annual UK growth to rise from 1.25% in 2019 and 2020 to 1.75% in 2021. While growth for 2019 is slightly faster than predicted in August, before the Brexit deal was announced, it would be weaker in subsequent years as the impact of extra trade barriers started to bite.
The Bank’s Monetary Policy Report said weaker global growth and its new assumptions about Brexit would knock 1% off UK growth over the next three years compared to its forecast in August.
Policymakers expect the UK economy to have grown by 0.4% in the three months to September this year, double its estimate in August amid a recovery in the UK’s dominant services sector.
However, growth in the final quarter of the year is expected to fall back to 0.2%.
How big is the UK’s economy?
Spending pledges by the government are expected to boost growth in the coming years.
However, policymakers said Brexit would continue to dominate the economic outlook and could permanently reduce long-term growth.
The Bank also cited research that showed the current level of business investment is around 11% lower because of Brexit uncertainty.
