Mark Carney has said the impact of a no deal Brexit on the UK economy will be similar to a banking crisis, with a deep recession, and a sharp drop in house prices.
The Bank of England governor said the Bank was preparing for a 'severe economic shock' scenario, which included inflation of 4 per cent, a recession where GDP shrinks by as much as 7 per cent, house prices falling by a third and unemployment reaching 9.5 per cent.
The annual "stress tests" the Bank conducts to measure the impact of a variety of negative situations on the economy are a useful guide to what he thinks will happen if the UK leaves the European Union in March next year without a deal having been reached.
Mr Carney said a no deal Brexit is "no worse" in terms of its impact on the economy than a banking crisis would be.
If a no deal outcome were confirmed, then the value of sterling would be expected to fall against other currencies. The central bank would then raise interest rates to try to stop inflation rising.
A scenario where inflation is rising and GDP growth is negative is known as "stagflation".
If the Bank raises interest rates to curb inflation, the next dilemma would be that it could have a negative impact on GDP, probably causing unemployment to rise and growth to slow.
But if the central bank doesn’t raise interest rates, then inflation will rise, making the cost of goods and services in the UK more expensive, and harming the economy.
David Coombs, multi-asset investor at Rathbones, said he expects stagflation to hit the UK economy, and has positioned the funds he manages for such a scenario.
Henry Dixon, who runs the £1.1bn GLG Undervalued Assets fund, said the potential outcome of a no deal Brexit is that the UK trades with the rest of the world in accordance with the World Trade Organisation (WTO) agreements, which place tariffs on goods.
But Mr Dixon said the fall in the value of sterling would likely be greater than the percentage rise in the cost of UK exports, and that means the net effect will be exports of UK goods and services will be cheaper, boosting the economy.
Philip Milton, who runs Philip Milton and Co, an advice firm in Devon, said he was "sanguine" about the impact of Brexit on the economy.
Mr Carney said the Bank of England continued to base its policy decisions on the assumption that there will be a soft Brexit, but he said the chances of a no deal Brexit were "uncomfortably high".