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BoE governor Carney warns on Brexit, admits could spark recession in U.K

Published 05/12/2016, 08:38 AM
© Reuters.  BoE governor Carney warns that a Brexit could possibly cause a recession in U.K.

Investing.com – Bank of England (BoE) governor Mark Carney reiterated the warning of the economic effect should the U.K. vote in favor of a Brexit, as Britain leaving the European Union (EU) is known, and admitted that a recession was a possibility.

Speaking on Thursday in a press conference on the inflation report, that was previously released along with the BoE’s unanimous decision to keep interest rates unchanged, Carney warned that the upcoming June 23 referendum on the U.K.’s membership had “pushed up uncertainty measures to levels not seen since the euro zone crisis” and defined the vote as the “elephant in the room”.

In the inflation report itself, the BoE cut its growth forecast for the second quarter to 0.3%, compared to the prior estimate of a 0.5% expansion.

For 2016, the central bank lowered its estimate for growth to 2.0%, from the prior 2.2%.

However, Carney explained that those updated forecasts were based on the U.K. voting to remain in the EU.

While the BoE governor insisted that a “vote to leave could have material effects” on the British economy, he admitted that the referendum itself was causing difficulties on reading the current economic data and said that the BoE could be over- or under-estimating the underlying momentum in the economy if Britain decided to stay in the EU.

Regardless of the decision that the British people make on June 23, Carney promised that the BoE would address the consequences.

However, he warned that there were limits to what monetary policy could do and signaled it could not immediately respond to all the consequences of a shock.

Carney insisted that the forecasts published on Thursday were based on the assumption that the U.K. would vote to stay and that a vote to leave would have a “material impact on growth and demand and unemployment”.

When questioned if materially lower growth meant a recession, Carney pointed out that there were a range of views contained in forecasts, but admitted that “it could possibly include a technical recession”.

Of note, a technical recession is defined as two consecutive quarters of growth which suggests that the U.K. could contract through the second half of 2016 if the U.K. chooses a Brexit.

In any case, Carney reminded reporters that monetary policy has a lag so any sharp drop in economic activity would not be remedied until stimulus had time to feed through.

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