Carney Sees Significant Chance of Inflationary No-Deal Brexit

August 5, 2019

There’s a “significant possibility” of a no-deal Brexit that will leave Britons paying more for food and petrol, according to Bank of England Governor Mark Carney.

Speaking in a BBC Radio interview Friday, Carney said that while the BOE will do everything it can to support the economy if the UK leaves the European Union without a deal, such an outcome will be inflationary. While a probable drop in the pound would help the economy adjust, that would drive up prices in supermarkets and petrol stations, he said.

 

“This is straight economics,” Carney said. The exchange rate “adjusts to what is a real economic shock -- the change in trading relationship means that incomes would be lower here relative to what they otherwise would have been, for a period of time.”

 

“It may take a while to get to the sunlit uplands,” he added.

 

The pound has tumbled in recent weeks, completing its worst monthly performance in almost three years in July, as new Prime Minister Boris Johnson ’s rise to power boosted concerns over a no-deal Brexit. Johnson has repeatedly said he’ll take the UK out of the EU on Oct. 31, with or without a deal, and the government has doubled spending on no-deal preparations.

 

Carney reiterated Friday that the BOE’s policy response to a no-deal Brexit wouldn’t be automatic, and there are limits to the institution’s ability to accept inflation. Speaking after the publication of the bank’s Inflation Report Thursday, the governor said that the BOE can’t necessarily deliver a growth-boosting package in the event of Brexit without a transition.

 

In the radio interview, Carney said it was still “more likely than not” that the UK will leave with a deal, and that under the BOE’s forecasts based on such an outcome, the economy “really picks up” in coming years.

 

Source: Bloomberg

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