The uncertainty regarding the upcoming referendum of whether UK will stay in the EU is impacting the British economy. Confidence amongst consumers and companies has worsened markedly since the beginning of 2016. The first quarter economic growth has decelerated to 0.4% q/q, as compared with the Q4’s growth of 0.6%. The sluggishness is expected to continue in the second quarter.

The UK central bank has mentioned that the rebound of the economy primarily relies on 23 June’s referendum results. A possibility of the UK exiting the EU comprises of the main domestic risk for the UK economy. Meanwhile, in the past few months, global risks have diminished. In the mean time, developments in inflation have also been disappointing , noted Commerzbank in a research report.

A stronger pound, along with lower energy prices has been mainly responsible for the UK central bank to miss its target rate of 2% for the last two years. May inflation report had mentioned that inflation will take around two more years to return to the target level. The central bank’s inflation outlook also poses risk from the referendum.

If the UK leaves EU, the pound is expected to decline sharply, considerably pushing inflation up, according to Commerzbank. The Bank of England will then be in a dilemma of whether to curb inflation with the support of restrictive policy or offset a weaker economy and rising jobless rate with additional expansionary policy, added Commerzbank.