Carney Won’t Assume No-Deal Brexit Even as Markets Say Otherwise

(Bloomberg) -- Mark Carney put the onus on Boris Johnson’s government to explain what form Brexit will take, insisting that the Bank of England should base its forecasts on an orderly outcome in the absence of any better guidance.

The bank published updated forecasts that acknowledged the economy could follow a “wide range of paths” in coming years but which specifically excluded the possibility that Britain would fail to reach a withdrawal agreement with the European Union. While Carney said at a press conference in London that no-deal would probably lead to a drop in the pound and slower economic growth, he declined to give a view on how likely such an outcome would be.

“They won’t make any assumptions about how the government might change policy if it’s not been announced and, to be fair, that’s completely reasonable,” said George Buckley, an economist at Nomura. The wide range of market pricing indicates that “there aren’t many people out there who really know how this is going to finish.”

The BOE’s dilemma puts it in a wait-and-see mode even as the world’s biggest central banks turn dovish amid slowing global growth and persistent trade tensions. The Federal Reserve on Wednesday delivered a quarter-point cut and suggested there’s more to come. The European Central Bank is looking at adding more stimulus as early as September.

The assumption of a smooth Brexit implies that interest rates will need to rise, putting the BOE at odds with investors who are pricing a cut. The prime minister’s pledge that the U.K. will leave the EU on Oct. 31 “do or die” has prompted the pound to tumble to the lowest since early 2017.

Carney said the BOE has prepared the financial sector for the “contingency” of a no-deal Brexit, and said businesses are doing what they can to prepare but that they still expect output to fall.

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“Setting out its best guess would have given more clarity over understanding how the central bank might react to an outcome that has become increasingly likely in recent weeks.”

--Dan Hanson
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He also pushed back on the suggestion that leaving on Oct. 31 without a deal would be better than the current prolonged uncertainty, saying that “whatever outcome the country chooses, it is always preferable to have a transition to it.”

He reiterated that the monetary policy response isn’t automatic and rates could move in either direction, as a disorderly departure would be an “instantaneous shock to both to demand and supply.”

Acknowledging the weaker global backdrop, the BOE lowered its forecast for economic growth this year, sees slower export growth and weak business investment persisting into 2020.

The BOE’s forecasts show that in a smooth Brexit, one quarter-point rate hike over the next three years will bring inflation below the 2% target. That compares with a central forecast, based on the market’s expectation of a quarter-point cut, for inflation to pick up to 2.4%. The forecast also sees excess demand at a whopping 1.75%.

In normal circumstances, that would imply that the BOE should be raising rates soon. But given the uncertainty around Brexit, all nine policy makers deemed the current stance appropriate.

“Let me reiterate: We don’t speak for the government, but listen to the government and their stated policies,” Carney said. “It’s still the stated aim of government to have a deal.”

--With assistance from David Goodman, Olivia Konotey-Ahulu, Lucy Meakin, Catherine Bosley, Jeannette Neumann, Zoe Schneeweiss, Andrew Atkinson and Brian Swint.

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Paul Gordon, Brian Swint

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