Carney said to warn rates may rise in "no-deal Brexit" outcome

The Bank of England (BoE) governor joined the UK cabinet, chaired by Prime Minister Theresa May, to share worst-case economic scenarios used by the central bank, people familiar with the matter said.

Sep 15, 2018 03:09 IST India Infoline News Service

Mark Carney gave a stark warning of the dangers of a no-deal Brexit that could see mortgage rates raised even as economic output and house prices tumble.

The Bank of England (BoE) governor joined the UK cabinet, chaired by Prime Minister Theresa May, to share worst-case economic scenarios used by the central bank, people familiar with the matter said. He told those present that crashing out of the European Union (EU) without an agreement would lead to a fall in the pound and higher tariffs, pushing inflation higher.

That would make it harder to cut borrowing costs to support the economy as the BoE did in the aftermath of the Brexit vote in 2016, said the people, who asked not to be named because the discussions were private.

Carney outlined an extreme scenario in which house prices fall by 35%. The BoE has previously run stress tests showing that banks could cope with such a situation.

A spokesman for the BoE declined to comment.

Central bank policymakers, who cut rates to a record-low 0.25% in August 2016, have increased borrowing costs twice in the past year to keep inflation in check. Officials have previously said that Brexit could prompt a policy move in either direction.

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Chancellor Philip Hammond announced this week that Carney will stay on an extra seven months to ensure continuity during the transition out of the EU after the UK formally exits in March 2019.

Carney’s role in the Brexit debate stirs controversy. While some saw him a pillar of stability in the aftermath of the referendum, eurosceptics have criticized him for wading too far into the political debate with overly-gloomy predictions. Jacob Rees-Mogg, a Brexit purist, called him the “high priest of project fear.”

The governor used an opinion piece in the Daily Mail Friday to push back on criticism of the BoE’s response, writing that the central bank’s “job is to prepare for the worst, not hope for the best.”

Carney’s high-impact appearance came as the BoE’s Monetary Policy Committee voted unanimously Thursday to hold interest rates unchanged at 0.75% after hiking at the last gathering in early August. They reiterated that Brexit was the biggest challenge to the outlook and that uncertainty about the UK’s future outside the EU had risen.

Source: Bloomberg

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