Carney has always tried to steer a careful course based on the presumption of a smooth departure for the U.K. but Boris Johnson’s coronation as a hard Brexiting prime minister means that outcome is far from assured. Financial stability is one of the bank’s core responsibilities and its mettle is being tested.
While foreign exchange is beyond Carney’s official remit, companies have to be able to rely on a fairly predictable currency outlook. That’s hard to do when analysts at Bloomberg Economics are saying sterling could drop another 13% if Britain crashes out of the EU without agreement. So the pound will no doubt dominate proceedings at Thursday’s BOE press conference, which will follow a quarterly inflation report that’s been made even more crucial by the looming Brexit deadline.
With U.K. wages already outstripping inflation, this would usually be a time for policymakers to look at raising rates. Yet how can a sensible central bank remain hawkish three months ahead of a possible disorderly break from the country’s largest trading partner? The problem for Carney is that rate cuts would put even more pressure on the pound, pushing up the price of imported goods for business and consumers.
Indeed, some of sterling’s weakness is already down to market disbelief about the BOE’s ability to raise rates. Since mid-June, Carney and other members of the MPC have slightly softened their previous position and have even outlined the potential for the bank rate to be cut close to zero in the event of a no-deal Brexit.
But using interest rates alone seems rather a blunt instrument. As my colleague Mark Gilbert argues, mortgage lenders are reluctant to lower their fixed-rate pricing in line with falling money market rates. Unless there’s an actual boost to consumer lending, merely cutting the bank rate is unlikely to have much impact if it isn’t transmitted to the real economy.
It’s not as if the bank’s track record on managing the uncertainty around Brexit fills you with confidence. It had a bad experience soon after the 2016 referendum when it chucked the proverbial kitchen sink of stimulus at the banking system to turbocharge lending. As it happened, the economy didn’t struggle anywhere nearly as badly as was feared, resulting in the bank having to row back rapidly on the measures - including hiking rates twice to the current 0.75%.
In fairness, Carney has made significant progress with regulatory oversight of Britain’s banking system. The BOE has been at pains to tell everyone that at least the financial markets are prepared to weather any upcoming storm, if not the economy.
Nonetheless, as the political temperature rises it’s time the bank communicated its plans to support the wider economy. Some clarity on its rate stance and broader plans in the event of a disorderly Brexit will be a decent start. It might even stabilize the pound.
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Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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