Bank of England gives nod to Brexit deal due to no-deal fears
The Bank of England looked to back the Prime Minister’s withdrawal agreement on Tuesday, but only due to the likely dangers of crashing out of the European Union without a deal.
Appearing before the Treasury Select Committee, Bank of England Governor Mark Carney was quizzed by politicians alongside other members of the interest rate-setting Monetary Policy Committee.
The hearing started by asking about the deal secured by Theresa May, which is facing hostility across Parliament. Carney reiterated that the Bank had long advocated a transition period and said he expected the current deal to “support economic outcomes”.
The Prime Minister’s deal includes a so-called implementation period from lasting March 2019 to 31 December 2020. Some, especially more hard-line Brexiteers, are unhappy about the length of this transition period.
But Carney said: “We have emphasized from the start the importance of having some transition between the current arrangements and the ultimate arrangements. So we welcome the transition agreement in the withdrawal agreement….and take note of the possibility of extending that transition period.”
He also warned that a no-deal exit would be a “large, negative shock to the economy”, with trucks stuck at Dover, “immediate friction costs”, lost access to a major market and longer-term trade costs.
“It wouldn’t be a happy situation to be in,” he said.
Asked about interest rates, fellow MPC member Michael Saunders said a no-deal exit would be a major supply shock and that “if you have queues at Dover, the answer is not lower interest rates”.
Andy Haldane, the Bank's chief economist, said that fears of a no-deal Brexit was already damaging the economy: “What we have already seen is uncertainly around a no-deal having an impact on businesses. As we have got nearer to the point withdrawal, that has had a more material impact.” He added that this could lead to “somewhat weaker” growth in the four quarter. In the third quarter the economy grew by 0.6%.
Deputy governor Sir John Cunliffe insisted, however, that even in a no-deal scenario, the UK “won't see a financial sector meltdown” of the type witnessed in 2008.
Hinesh Patel, portfolio manager at Quilter Investors, said a no-deal Brexit would mean the bank would need to balance falling demand and rising inflation.
“From the Bank of England’s perspective the biggest concern above all else is the threat of a disorderly Brexit. A tumultuous departure would leave the Bank in the impossible position of trying to manage the risk of rising imported inflation if the pound were to fall further, while also trying to create conditions that are supportive of growth through a difficult period for the economy," Patel said.
"The Bank has been really clear and consistent in pointing out its view that Brexit uncertainty has stunted business investment, a key driver of growth.
"Therefore in the event of a disorderly Brexit, Carney and his colleagues would likely anticipate a further shrinkage in business investment and would be tempted to respond with stimulus, but that in turn makes it difficult for them to keep inflation down."