The Governor of the Bank of England, Mark Carney, has warned that financial markets are likely to be volatile in the wake of Parliament’s rejection of Theresa May’s Brexit plans.
The pound slumped but then rallied sharply on Tuesday night after Theresa May’s Withdrawal Agreement was comprehensively rejected by MPs, throwing the Government into disarray.
Some analysts suggested the reaction signalled that traders now expected Article 50 to be extended, reducing the prospect of the UK crashing out of the European Union with no transition period on 29 March.
Mr Carney, giving evidence to the Treasury Select Committee (TSC) suggested that the Bank was hearing similar things, but stressed that further volatility in foreign exchange markets was probable.
“Market sentiment is affected by developments. The view was most clearly expressed in foreign exchange market [on Tuesday] where there was a sharp rebound,” he said.
“[It] would appear to reflect some expectation that process of resolution would be extended and that the prospect of no deal may have been diminished. I’m not giving my opinion, I’m giving the market’s initial take. One would expect continued volatility.”
He added: “There has been a small rally in Gilts [UK Government bonds], some tightening in bank funding spreads. But I wouldn’t put too much weight on these very small moves.”
“The market is waiting.”
Sterling on Wednesday morning was tradeing at $1.2853, flat on the day. Against the euro it was up 0.24 per cent at €1.1291.
Mr Carney was also asked at the TSC whether the Bank thinks the Treasury needs to expedite the introduction of various no-deal regulatory powers to ensure financial stability in the event of a no-deal.
The Governor said that the main area of concern related to financial firms that were winding up, which would not be covered by the Bank’s temporary regulatory recognition regime for EU firms which would kick in in the event of no deal.
“When I go back to the Bank there will be some stern looks at me for saying that but I am testifying and in this case [they are needed] before 29 March,” he said.
“Firms that are running off – they need to know in advance,”
The Bank of England produced no-deal stress test scenarios for the UK banking system in December. The worst-case scenario modelled sterling falling to below $1.
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