As sterling reaches 31-month lows against the dollar, the Bank of England (BoE) has warned of consequences for the UK economy in the event of a no-deal Brexit.

If Britain are to leave the bloc without a deal on 31 October, it will be left worse off and could trigger falls in economic output, a rise in inflation and a drop in the pound that could see sterling at record lows against other currencies, the UK central bank said.

In what could be interpreted as a warning shot to the new Prime Minister, Boris Johnson, and Chancellor, Sajid Javid, the bank slashes its economic growth forecast for this year and 2020, warning that even in the even of a smooth Brexit, there is still a one-in-three chance of a recession hitting Britain within the next year.

However, the bank’s Monetary Policy Committee (MPC) voted unanimously to leave interest rates at 0.75 per cent and its other monetary policy levers unchanged in August. Despite this, in its meeting’s minutes, it added that assuming a smooth Brexit “increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2 per cent target.”

Under its formal position, the BoE bases all of its forecasts on a smooth Brexit, but for the first time in its minutes, addressed the implications of a hard Brexit, adding: “In the event of a no-deal Brexit, the sterling exchange rate would probably fall, CPI inflation rise and GDP growth slow.”

The forecast comes as Javid pledged an extra £2.1bn in funding to “turbocharge” no-deal Brexit preparations.

In the report, the central bank cut its economic growth forecast for this year and next, reducing it from 1.5 per cent and 1.6 per cent respectively to 1.3 per cent in each year – the weakest annual rate forecast since 2012.

Furthermore, sterling, which touched a 31-month low against the dollar earlier yesterday, rose slightly back above $1.21 in the wake of the publication of the meeting's minutes and the accompanying Inflation Report.

Since Johnson took office, the pound has been weakened as a result of the new Prime Minister’s stance on Brexit. Although, Thursday’s movements were largely dictated by a stronger dollar after the US Federal Reserve did not meet investor hopes on further interest rate cut guidance when it reduced its key borrowing rate on Wednesday night.

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