Mark Carney reiterated on Thursday his warning that there is “little” the Bank of England would be able to do to buttress the economy in the case a disorderly Brexit delivers a “fairly large” blow to the supply-side of the economy.
The BoE governor said an abrupt Brexit, while not the most likely scenario, would probably deal a significant hit to the supply-side of the economy. If this scenario came to fruition, he warned, “there is little monetary policy can do.”
Brexit would affect demand for UK goods, he said. Those effects would be more negative the more disruption there was between the terms of the current relationship and the post-Brexit arrangement, he said.
“Shifts in production will be neither seamless nor costless,” Mr Carney said, with the risk of a hit to supply if there was a disruptive Brexit more rapid than advanced economies were accustomed to handling.
That could mean the Bank of England extended the horizon for inflation to return to its target rate of 2 per cent, the governor said, with the Bank potentially holding off interest rate rises to avoid imposing further shocks to a fragile UK economy post-Brexit.
Mr Carney pointed out, however, that at the moment “households remain resilient to a Brexit that has not happened.” Business investment had however struggled amid the uncertainty of the UK’s split with the EU, due to take place next March.
Speaking on the current state of the economy, Mr Carney pointed to the robust labour market as a sign of strength. He noted that employment and job vacancies are at record highs while the jobless rate is near historic lows.
Sterling remained near its highs of the days during Mr Carney’s press conference, which followed a decision by the BoE to hold interest rates steady, as was widely expected. The central bank additionally said that in the case of an orderly Brexit, it would need to raise rates eventually to 1.5 per cent, double the current level.
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