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Carney warns BoE 'powerless' in hard Brexit scenario

Carney warns BoE 'powerless' in hard Brexit scenario

Mark Carney has asserted that under a no-deal Brexit UK house prices would be 35 per cent lower than they would otherwise have been, while GDP would decline and unemployment rise, with the Bank of England powerless to intervene.

The governor of the Bank made the remarks as he presented a number of scenarios to the Prime Minister and cabinet on 13 September,  according to FTAdviser sister title the Financial Times.

This included a "disorderly" no deal, defined by the governor as the UK exiting the EU without a deal and without a transition period, which, he said, would lead to outcomes similar to the financial crisis.

The governor said, unlike in the period immediately after both the financial crisis and the referendum vote in 2016, the Bank of England couldn’t cut interest rates to stimulate economic activity.

Instead, he said, interest rates would likely rise in order to prevent sterling falling further.

Mr Carney had previously told the Treasury select committee that because the supply of goods and services would be restricted in this scenario, those goods would be more expensive, leading to higher inflation.

This inflation would be permanent in nature and as such different to the inflation caused in the aftermath of the referendum result, which was temporary in nature and a function of the the falling currency.

Cutting interest rates generally leads to inflation. Because the inflation that came immediately after the referendum result was temporary, Mr Carney was able to ignore it and cut interest rates to stimulate growth.

But as the inflation caused by a no deal Brexit would, in his view, be permanent, the central bank would be unable to ignore it.

As a result, he said, interest rates would have to rise in order to address the higher inflation. Because higher interest rates lead to higher repayment costs for consumers and businesses, this means the amount of cash circulating in the economy for spending and investment falls, leading to a decline in GDP.

But Mr Carney has continuously emphasised that he views a Brexit where an agreement is reached between the UK and the EU as the most likely outcome, and his views on house prices and other economic matters are different in such a scenario.

Andrew Bell, chief executive of the £2.3bn Witan investment trust, said the UK stock market is currently marching to a "Brexit drum", with the issue overshadowing everything else.   

david.thorpe@ft.com