Carney Says U.K. Is Better Prepared for No-Deal Brexit

(Bloomberg) -- The U.K. has made “constructive developments” in preparing for a no-deal Brexit, though the economic impact of crashing out of the European Union would still be substantial, according to Bank of England Governor Mark Carney.

Authorities have taken steps to protect derivative markets, reduce financial risk and minimize trade frictions, while rolling over some third-country trade agreements that Britain has through the EU, Carney told a House of Lords committee Tuesday.

If the U.K. leaves the bloc at the end of the month with no deal in place, it’s more likely to be a disorderly than a disruptive event, he said. However, recent damage-limitation efforts mean the impact would be less severe that suggested by BOE analysis published in November.

In its assessment of possible Brexit outcomes, the BOE said that a disorderly Brexit was the most economically harmful. Such a scenario would see GDP drop 8 percent, house prices fall 30 percent, unemployment rise to 7.5 percent and inflation accelerate far above the BOE’s 2 percent target.

“There has been progress in preparedness and that reduces the level of the economic shock,” Carney said. “To be absolutely clear, we still expect that there would be a material economic shock. Half of the businesses are straight up reporting to us that they’re not prepared for a no-deal Brexit.”

Downbeat Assessment

Half of those who say they are prepared say that they’re “as prepared as we can be,” Carney said.

The assessment reflects the downbeat analysis surrounding the central bank’s latest set of forecasts released in February, in which it cut its estimates for growth. Carney said then that the prospect of a no-deal Brexit had increased.

The central bank said earlier Tuesday that it’s putting in place more buffers for the banking system as the prospect of a messy Brexit continues to hit companies and consumers. But that doesn’t guarantee economic stability, Carney said.

When it comes to monetary policy, the implied path of interest rates isn’t high enough, Carney said. While in the short term there’s less pressure on domestic prices as the economy slows, inflation will be above the BOE’s target throughout its forecast, Carney said, assuming there is a smooth Brexit.

At the end of the forecast, the economy is likely to be growing above trend, there will be more than full employment and factories will be running hot, he said. “In other words, the current path of interest rates is not firm enough, it’s not quite high enough, to be consistent with us fulfilling our mandate, which sends a broad signal in terms of the stance of policy,” he said.

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, Andrew Atkinson

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