BoE's Carney sees 'uncomfortably high' risk of no-deal Brexit

03 August, 2018, 17:07 | Author: Kathy Ellis
  • The Bank of England’s monetary policy committee appears almost certain to raise interest rates this week

The pound slipped to below $1.30, its lowest point in eleven days, as Mr Carney issued the warning on negotiations with Brussels.

Mr Carney revealed in an interview on BBC Radio 4 that the Bank could be forced to cut interest rates in some Brexit scenarios, describing a no-deal outcome as "highly undesirable".

"We ran the system through a stress test which had real estate prices going down by more than a third, house prices and commercial real estate, interest rates going up by nearly four percentage points, unemployment going to nine percent and the economy going into a four percent recession".

The Bank of England has increased interest rates to their highest level for almost 10 years after the summer heatwave helped the economy bounce back from a snow-hit start to the year.

The BoE said the economy "could be influenced significantly by the response of households, businesses and financial markets" to news on Brexit.

Referring to last year's stress tests on the banking system, Carney said: "We've put the banks through the wringer to make sure that they have the capital".

Prime Minister Theresa May must find a way to strike a deal with the European Union, which has already rejected her preferred plan on trade, then sell that deal to her deeply divided Conservative Party, before putting it to a vote in parliament. "Our responsibility in the other half of the bank - our job is to look at what could go wrong and what we could do to make sure that the Bank is in a robust position so it lessens the impact of a no deal Brexit. We don't want to have people worrying that they can't get their money out", he told the BBC's Today programme.

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"Parties should do all things to avoid (a no deal Brexit)", Carney said.

"We have prepared the financial institutions for very hard circumstances".

However, he said that even with liquidity and capital, the banks could not solve all Brexit-related financial problems.

The BoE said Britain's economy, while growing more slowly than in the past ahead of Brexit, was operating at nearly its "speed limit", or full capacity, raising the prospect of more home-grown inflation pressure ahead. Now, for the first time in nearly a decade, official interest rates are above the level they reached in the crisis.

"We've already done the stockpiling", he said.

The report showed its predictions are based on financial market expectations for rates to rise to 1.1 per cent by mid-2021, which would suggest two more quarter-point rises, with the next not until next May. That compares with the long-term average of 5%.

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