No-deal Brexit an 'instantaneous' shock to economy: Bank of England governor

Bank of England governor Mark Carney also said that in the event of a no-deal Brexit, the falling pound would suddenly increase prices for imported goods such as petrol and food and force up inflation.
Bank of England governor Mark Carney also said that in the event of a no-deal Brexit, the falling pound would suddenly increase prices for imported goods such as petrol and food and force up inflation.PHOTO: AFP

LONDON (AFP/BLOOMBERG) - Bank of England governor Mark Carney on Friday (Aug 2) warned that a no-deal Brexit would be a shock for Britain, causing supply disruption and potentially undermining entire sectors of the economy such as the car industry and farming.

"With no deal the shock to the economy is instantaneous and instantly.... you actually have businesses that are no longer economic," he told BBC radio, warning that the number of companies affected could be "substantial".

He said that the institution cannot necessarily deliver a growth-boosting package in the event of Brexit without a transition.

In a week when the pound capped its worst monthly performance in almost three years, he also said it’s “highly unlikely” the Bank of England would intervene to support the currency. Analysts expect it to fall further if Britain leaves the EU with no deal.

“They don’t want to tell the market that they’re going to go out and do a massive stimulus, even if the market finds it quite hard to believe that they wouldn’t,” said Elizabeth Martins, an economist at HSBC Holdings Plc. “A really disruptive supply shock to the economy is beyond the scope of monetary policy, but clearly the Bank of England will do what it can.”

On Thursday, Carney emphasised that the bank’s reaction will depend on what form of no-deal Brexit occurs, such as a jump to trading on World Trade Organization rules with no mitigating factors, or whether there is a degree of preparedness on border infrastructure.

“We will do what we can in those circumstances to support jobs and activity, but there are limits,” he said.

 
 
 
 

He added that the impact of the weaker pound on exports has begun to fade, leaving little room for optimism on whether it will help boost output. Carney also said that in the event of a no-deal Brexit, the falling pound would suddenly increase prices for imported goods such as petrol and food and force up inflation.

“This is straight economics,” Carney said. The exchange rate “adjusts to what is a real economic shock – the change in trading relationship means that incomes would be lower here relative to what they otherwise would have been, for a period of time.” “It may take a while to get to the sunlit uplands,” he added.

Carney’s comments come in a week in which new UK prime minister Boris Johnson has repeatedly said he will take the UK out of the EU on Oct 31, with or without a deal, and as the government doubled spending on no-deal preparation. The stance has spooked investors, with the pound’s slide accelerating this week as concerns over a chaotic exit mount.

It is “highly, highly unlikely” that the bank would intervene to help boost the currency, Carney said. “Markets adjust. Part of the shock absorbing function here would be a change in the value of sterling, market interest rates and equities.”

“It would be unwise to intervene given the fundamental backdrop would warrant pound devaluation,” said Derek Halpenny, European head of global markets research at MUFG. “The only way the BOE would get involved would be through its decision on monetary policy.” 

Carney’s apparent reluctance to ride to the rescue following a no-deal stands in contrast to his actions after the 2016 referendum, when he was dubbed the only “adult in the room” by former BoE policy maker David Blanchflower.

Carney appeared on television the day after the referendum, pledging to support the financial system in an attempt to reassure Britons and investors reeling from the vote to leave the EU. Even with his intervention, the pound ended the day down more than 8 per cent, its worst ever daily slump.

The governor added he was still expecting a deal with Brussels, which Boris Johnson's new government has said it is aiming for.

But he warned there was "a significant possibility" that Britain could leave the EU with no divorce agreement.

"There are some very big industries in this country where that which is highly profitable becomes not profitable, becomes not economic" in case of no-deal, Carney said.

"Very difficult decisions need to be taken."

Still, Carney was keen to say that the BoE has made sure banks are ready for any Brexit shock. On monetary policy, he said it can “respond to circumstances as they change” and will ultimately act to achieve the inflation target.