The Bank of England's Governor, Mark Carney, has spelled out that in the Bank's view Brexit will make Britain worse off than otherwise and also appeared to take an indirect swipe at the optimistic view of Boris Johnson and others that the UK can “have its cake and eat it” after leaving the European Union.
In his Mansion House speech on Tuesday morning Mr Carney said that “weaker real income growth [is] likely to accompany the transition to new trading arrangements with the EU”.
This assumption was embedded in the Bank's latest official forecasts, which showed the level of UK GDP in 2019 relative to its pre-June referendum forecasts lower by around 1.5 per cent, or £30bn in today's money.
But this is the most explicit the Governor, who has been attacked by some hardline Brexiteers for supposedly “talking down” the economy, has been on the issue.
Referring to the slump in sterling since last June's vote, Mr Carney told his audience that “markets have already anticipated some of the adjustment” and suggested that without a post-2019 transition process for the UK, which would retain single market and customs union membership for the UK for a period, the situation could deteriorate further and cause some firms to move operations out of Britain.
“Depending on whether and when any transition arrangement can be agreed, firms on either side of the channel may soon need to activate contingency plans. Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption,” he said.
In an interview with The Sun last September Mr Johnson, the Foreign Secretary and leading light of the Leave campaign, said of Brexit Britain: “Our policy is having our cake and eating it.”
Mr Johnson was referring to his belief that the UK could end EU freedom of movement while also keeping UK trade with the continent, our biggest export market, as free as before.
The Governor's references to a transition arrangement echoes the call, made earlier at the Mansion House, from Chancellor Philip Hammond for “mutually beneficial transitional arrangements to avoid unnecessary disruption and dangerous cliff edges”.
This represents a reassertion of the Treasury in Brexit policymaking in the wake of the shock general election result, which deprived the Conservatives of their parliamentary majority.
Mr Hammond had been sidelined by Downing Street in the campaign and Ms May had resurrected an earlier threat to walk away from the Brexit negotiations with no deal at all – a prospect that fills most business organisations with horror due to the profound shock this would inflict on the economy.
The Governor also said that, in his view, it was not yet the right time to raise interest rates, despite inflation hitting 2.9 per cent in May.
His comments sent sterling down 0.3 per cent against the dollar to $1.2694.
Three out of eight members of the Bank's rate-setting Monetary Policy Committee voted to increase rates from 0.25 per cent to 0.5 per cent last week, the largest vote for an increase in the cost of borrowing since 2011.
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