Carney Is Hoping for the Best, Preparing for the Worst on Brexit

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Hoping for the best and preparing for the worst aren’t mere words when it comes to Brexit, according to Bank of England Governor Mark Carney.

“From Brexit, you assume no deal and see how the system reorganizes itself,” Carney said at a panel discussion Wednesday in Washington to mark the 75th anniversary of the Bretton Woods Agreement that established the ground rules for the post-World War II global economy.

Reflecting a shift in attitudes prevailing in financial markets in the wake of the global financial crisis, the current credo is to plan for something going wrong -- thinking that has shaped the Bank of England’s preparations for the various scenarios confronting the U.K. with Brexit ahead.

Pointing to the worst case of a shock ‘no-deal’ Brexit -- that is Britain crashing out of the EU with no laws, regulations in place to ensure smooth cross-boarder trade and orderly markets, Carney said the question becomes “what could happen and how should the system organize itself?”

At the same time, he was clear that “the core of the financial system is ready for Brexit, in the sense that it’s built up capital, built up liquidity."

‘No Resemblance to Lehman’

The U.K. is on course for a stronger-than-forecast first quarter, despite an escalating Brexit crisis that’s divided Parliament and the government, data Wednesday showed. The economy will expand 0.5 percent in the first quarter if GDP is unchanged in March, more than double the pace of the previous three months and outstripping the Bank of England’s 0.3 percent estimate.

A lack of clarity about the U.K.’s future trading relationships has weakened economic confidence and weighed heavily on business investment, which the central bank forecasts will slump this year. Extending the period of uncertainty risks adding to the pressure on firms and households to hold off on spending.

Carney plans to step down from his role at the BOE at the end of January after extending his tenure twice to help prepare for Brexit.

The Bank of England has been in “close contact” with the EU, Carney said “particularly about the famous unknowns if you have a very complicated system that has a shock." Markets will adjust and those adjustments could be quite substantial, while in the test of Brexit, “it may not actually be tested.”

On one point, he was quite clear. “It bears no resemblance to Lehman, in terms of the degree of preparation. Lehman was, ‘Yeah, it’ll be all right.’"

“We learned from that experience," he concluded.

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net;Katia Dmitrieva in Washington at edmitrieva1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Robert Jameson

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