By David Milliken and Andy Bruce
LONDON (Reuters) - Bank of England Governor Mark Carney said the BoE would only cut its economic forecasts to reflect the risk of a no-deal Brexit if Britain's next prime minister makes leaving the European Union without a transition agreement his preferred policy.
"In the event that the policy of the government were to switch, the forecast of the Bank of England would switch accordingly," Carney told lawmakers on Wednesday.
Last week, the BoE acknowledged the disconnect between the "smooth" Brexit scenario that underpins its forecasts and a more chaotic exit from the EU that many investors are increasingly thinking might happen and that could lead to interest rate cuts.
Carney, speaking to parliament's Treasury Committee, said both candidates to be prime minister - former foreign minister Boris Johnson and the current incumbent Jeremy Hunt - had said they wanted to reach a deal with the EU if possible.
His comments suggested the central bank was unlikely to make major changes to its underlying Brexit assumptions during its next round of economic forecasts, due to be published in August.
These forecasts underpin the BoE's main message to financial markets that interest rates are likely to go up in a "limited and gradual" way if a Brexit deal can be done.
Many investors take a different view, given the slowdown in the global economy as well as the risk of a no-deal Brexit. Some have begun to price in the possibility of a rate cut by the BoE.
Michael Saunders, one of the nine members of the BoE's Monetary Policy Committee, denied the difference was hurting the credibility of the British central bank.
"I don't think it's a communications failure on our side. I don't think it's a sign of loss of credibility over the Committee's commitment to the inflation target," he said.
But Oliver Blackbourn, a portfolio manager at investment firm Janus Henderson, said the BoE's assumption of a smooth Brexit transition looked "increasingly flawed" because Johnson and Hunt have both said they are prepared to lead Britain into a no-deal Brexit if necessary.
"Without taking a view on the political outcome - and being accused of bias as a result - there is a danger that the Bank’s forecasts may look increasingly detached from day-to-day reality," he said.
Carney repeated his view that the BoE was more likely to provide extra stimulus for the economy in the event of a no-deal Brexit than to tighten monetary policy.
Asked about comments he made last week, when he challenged a claim by Johnson that Britain could use world trade rules to avoid the hit of EU trade tariffs in the event of a no-deal Brexit, Carney stuck to his position that such a solution would only work if the EU was in agreement.
"I did not say that there needed to be the withdrawal agreement for GATT 24 to apply. I said there needed to be an agreement," he said when asked about a comment by Johnson on Tuesday that Carney had been wrong.
"There needs to be some form of agreement and an intention, and a credible intention to move toward a free trade (deal) or customs union," Carney said.