No-deal Brexit may force interest rate rise, says Bank of England governor Mark Carney

The governor suggested that, unlike after the referendum vote, rates may need to rise to curb inflation

Mark Carney, the governor of the Bank of England, has suggested that interest rates may need to rise, rather than fall, in the event of a no-deal Brexit.

In a speech in Ireland, he said Brexit is the “most significant” influence on the UK’s economic outlook and that the Bank’s job is to “plan for the worst”.

He added: “The appropriate [monetary] policy response is not automatic and will depend on the balance of the effects on demand, supply and the exchange rate”.

The governor had previously seemed to suggest that a no-deal Brexit could result in a rate cut to support the economy by making borrowing cheaper, as occurred after the Brexit referendum in 2016.

But according to reports of a briefing that Mr Carney gave to the cabinet on Thursday, he fears that such a rupture with the EU could represent a severe “contraction of supply” capacity in the UK economy. This could mean that inflation would be in danger of getting out of hand without early rate rises, particularly if sterling plummeted again, pushing up domestic import prices.

At that briefing, the governor also pointed to the results of last year’s banking stress tests that were judged by the Bank’s Financial Policy Committee of regulators to include the worst case scenario from a no-deal Brexit. This included a 33 per cent decline in house prices, relative to otherwise, over three years.

It also modelled the impact of a rise in interest rates to 4 per cent.

That would significantly increase the pressure on mortgage borrowers and raise the cost of finance for business borrowers.

Interest rates currently stand at 0.75 per cent, the highest since the financial crisis, after the Bank’s Monetary Policy Committee (MPC) raised them again in August.

Financial markets are currently expecting just one further hike by the end of next year.

A rise in rates to 3 per cent would add about £300 to the monthly repayments of someone with a £200,000 25-year repayment mortgage.

The government’s own internal forecasts suggest a long-term hit to the UK economy of failing to conclude a free-trade deal with the EU amounting to 8 per cent of GDP. That implies a fall in productivity growth capacity due to weaker trade with the largest and nearest commercial partners.

But many analysts warn the industrial and travel chaos likely to be unleashed by a no-deal scenario would also hit short-term demand, risking a recession – something that would ordinarily prompt a rate cut by a central bank.

The decision to raise or cut rates after a chaotic Brexit would not be made by Mr Carney alone – it is the nine-person MPC that would decide. But the governor’s view is generally held to hold significant sway in its meetings.

Mr Carney had been due to step down at the Bank of England in June 2019. But he has now accepted an invitation from the chancellor, Philip Hammond, to extend his term until 2020 to help steward the economy through the aftermath of Brexit.