Carney Can’t Save the Day When It Comes to No-Deal Brexit

(Bloomberg) --

Mark Carney won't be able to play the savior if the U.K. leaves the European Union with no deal at the end of October.

The Bank of England governor said that the institution can't necessarily deliver a growth-boosting package in the event of Brexit without a transition.

In a week when the pound capped its worst monthly performance in almost three years, he also said it's “highly unlikely” the BOE would intervene to support the currency. Analysts expect it to fall further if Britain leaves the EU with no deal.

“They don't want to tell the market that they're going to go out and do a massive stimulus, even if the market finds it quite hard to believe that they wouldn't,” said Elizabeth Martins, an economist at HSBC Holdings Plc. “A really disruptive supply shock to the economy is beyond the scope of monetary policy, but clearly the Bank of England will do what it can.”

On Thursday, Carney emphasized that the bank's reaction will depend on what form of no-deal Brexit occurs, such as a jump to trading on World Trade Organization rules with no mitigating factors, or whether there's a degree of preparedness on border infrastructure.

“We will do what we can in those circumstances to support jobs and activity, but there are limits,” he said.

He added that the impact of the weaker pound on exports has begun to fade, leaving little room for optimism on whether it will help boost output. In a BBC radio interview Friday, Carney said that another drop in the pound would certainly be inflationary.

Carney's comments come in a week in which new U.K. prime minister Boris Johnson has repeatedly said he'll take the U.K. out of the EU on Oct. 31, with or without a deal, and as the government doubled spending on no-deal preparation. The stance has spooked investors, with the pound's slide accelerating this week as concerns over a chaotic exit mount.

It's “highly, highly unlikely” that the bank would intervene to help boost the currency, Carney said. “Markets adjust. Part of the shock absorbing function here would be a change in the value of sterling, market interest rates and equities.”

Carney's apparent reluctance to ride to the rescue following a no deal stands in contrast to his actions after the 2016 referendum, when he was dubbed the only “adult in the room” by former BOE policy maker David Blanchflower.

“It would be unwise to intervene given the fundamental backdrop would warrant pound devaluation,” said Derek Halpenny, European head of global markets research at MUFG. “The only way the BOE would get involved would be through its decision on monetary policy.”

What Our Economists Say:

If there's no deal, “we would expect the Monetary Policy Committee to respond by easing policy, perhaps lowering rates to almost zero -- its estimate of the lower bound.”
--Dan Hanson, economist. Click here for the full INSIGHT

Carney appeared on television the day after the referendum, pledging to support the financial system in an attempt to reassure Britons and investors reeling from the vote to leave the EU. Even with his intervention, the pound ended the day down more than 8%, its worst ever daily slump.

Still, Carney was keen to say that the BOE has made sure banks are ready for any Brexit shock. On monetary policy, he said it can “respond to circumstances as they change” and will ultimately act to achieve the inflation target.

--With assistance from Olivia Konotey-Ahulu and Charlotte Ryan.

To contact the reporters on this story: Jill Ward in London at jward98@bloomberg.net;David Goodman in London at dgoodman28@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint, Lucy Meakin

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