Chaotic Brexit could force interest rate cut, warns Bank of England Governor Mark Carney

'A more disorderly transition, or a materially different end state from our assumption, would have implications for monetary policy' Mr Carney said

Ben Chu
Economics Editor
Thursday 24 May 2018 20:53
Comments
It seems that Governor Mark Carney and his colleagues have not been spooked by the turbulence in equity markets over the last week or so
It seems that Governor Mark Carney and his colleagues have not been spooked by the turbulence in equity markets over the last week or so

A disorderly Brexit could force the Bank of England to cut interest rates again sharply, according to its governor Mark Carney.

Mr Carney, speaking to the Society of Professional Economists in London on Thursday evening, suggested that the central bank might be forced to slash the cost of borrowing across the economy to help prop up growth.

“A more disorderly transition, or a materially different end state from our assumption, would have implications for monetary policy,” he said.

“The policy response would reflect the balance of the effects of a sharper Brexit on demand, supply and the exchange rate...Although the exact policy response cannot be predicted in advance, observers know from our track record that, in exceptional circumstances, we are both willing to tolerate some deviation of inflation from target for a limited period of time and that there are limits to that tolerance.”

The Bank’s current forecast assumes a smooth Brexit in March 2019.

Economists have repeatedly warned that a “no deal” Brexit would be a profound negative shock for the UK economy.

The Monetary Policy Committee held back from hiking rates earlier this month after growth collapsed to a five-year low in the first quarter of the year.

But the Bank’s latest inflation report projections imply around two rate rises by the end of 2019 and it said future increases “are likely to be at a gradual pace and to a limited extent”.

Rates are currently at 0.5 per cent. They were cut to 0.25 per cent, a historic low, in the wake of June 2016 Brexit vote.

Earlier this week Mr Carney told the Treasury Select Committee that the vote for Brexit had already effectively knocked 2 per cent off the UK’s GDP, largely through higher inflation due to the post-referendum sterling slump, and had cost each household £900 in the form of lower real wages.

He also warned the TSC that the UK economy urgently needs the single market and customs union transition agreed by Theresa May and the EU after March 2019.

Mr Carney said “if the implementation agreement doesn’t come to pass for whatever reason, there would be a potentially considerable real economy adjustment.”

However, speaking on Thursday, Mr Carney also mentioned a possible economic upside to the Bank’s current forecasts, saying “if there is progress towards the new, deep and special partnership the government is seeking, a boom in investment and potentially consumption could be unlocked, boosting output.”

He added: “From a monetary policy perspective, the Bank is ready for Brexit. The MPC is well-prepared for whichever path the economy takes. We have the tools we need.”

The Bank has drawn criticism from some City analysts and traders for giving confusing signals to markets about the likelihood of a May interest rate rise.

Speaking on the current outlook, Mr Carney warned that: “The weakness in demand at the start of the year could reflect a worsening of the underlying economic climate, not the temporary effects of adverse weather as the Committee currently assesses... there is a risk that households could opt to save rather than spend as their real incomes recover.”

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