The possibility that Britain could leave the European Union without a deal in March 2019 is “uncomfortably high,” according to Bank of England chief Mark Carney, who stressed the financial system was “ready” to withstand the potential shock.
“We have put the banks through the wringer well in advance,” Carney told the BBCs Today program on Friday, referring to stress tests that he said would ensure the banks “are there to lend to the economy” and “advance instead of retreat.”
“The U.K. financial system has tripled the amount of capital they had over the course of the last several years, they have increased the amount of liquidity by 10 times” in order to be “in a position to withstand a shock, wherever the shock comes from,” including a no-deal Brexit scenario, Carney said.
The worst-case scenario banks were tested on — which Carney stressed was not a prediction but preparation — involved “real-estate prices going down by more than a third, interest rates going up by almost 4 percentage points, unemployment rising to 9 percent, and the economy going into a 4 percent recession.”
“The financial system will be ready for that undesirable and still unlikely possibility,” Carney said, adding that a few outstanding financial issues “that cut across borders” and cant be solved by the banks alone are being addressed by European authorities and the U.K. government.
“We put them up because its the right thing for the economy, on the path the economy is on” — Mark Carney
The pound declined on the currency markets in the wake of Carneys comments, falling below $1.30.
Brexiteers were dismissive of Carneys warnings though. “Mark Carney has long been the high priest of project fear whose reputation for inaccurate and politically motivated forecasting has damaged the reputation of the Bank of England,” said Tory MP Jacob Rees-Mogg who leads the Brexiteer caucus on the backbenches.
Carneys comments come after Bank of England policymakers voted unanimously on Thursday to raise the benchmark interest rate for only the second time since the financial crisis, lifting the bank rate to 0.75 percent from 0.5 percent.
He insisted at a press conference Thursday the hike was part of its pathway to “limited and gradual” rises to get inflation back down to its 2 percent target. It is currently 2.4 percent.
Bank of England, London | Daniel Leal-Olivas/AFP via Getty Images
The central banker said Friday that although the average interest rate since the bank was founded in 1694 has been 5 percent, “we dont see it getting back to anywhere near that level for a long time.” That is partly because of structural changes in the British economy and also because of the uncertain global outlook — not least because of Brexit.
He said financial markets best guess is that rates would rise by a quarter of a percentage point in each of the next three years, taking the banks interest rate to 1.5 percent — though he stressed that was not a prediction.
Carney shot down the idea that the BoE raised rates to give it “leeway” to slash them again post-Brexit, saying: “We put them up because its the right thing for the economy, on the path the economy is on.”
He added: “There is a very broad range of potential outcomes in these Brexit negotiations and were entering a crucial phase. For a number of those possible outcomes, interest rates should be around current levels or potentially higher.
“There are other scenarios where interest rates might need to be cut, but that depends. Lets see what actually happens, how the negotiations culminate and what the transition is to that end state.”