(Bloomberg) -- The Bank of England stands ready to alter the economic assumptions behind its interest-rate stance if the government changes its Brexit policy, according to Governor Mark Carney.
Speaking in Parliament on Wednesday, Carney acknowledged there is a “natural tension” between the BOE’s assumption of a smooth departure from the European Union, and markets that are pricing in the possibility of a no-deal divorce. While the latter is not seen as the most likely scenario, investors expectations for such an outcome have risen, he said.
If the U.K. does crash out of the bloc, Carney said he sees a greater chance of additional stimulus but reiterated that there are “no guarantees” and interest rates could rise.
“In the event that there is progress toward a deal, the committee forecast becomes very relevant,” he told lawmakers on Parliament’s Treasury Committee in London. “In the event that the government switches policy, the BOE would switch.”
The BOE said at its June 20 meeting that, if the economy evolves as forecast, limited and gradual rate hikes will be needed to control inflation. That outlook, based on a smooth Brexit process, is starkly at at odds with financial markets, where the possibility that the U.K. will leave the EU without a deal has pushed the pound lower and prompted investors to start pricing in rate cuts.
While Carney noted that the stated aim of both candidates is to leave the EU with a deal, he acknowledged this could change. Boris Johnson, the front-runner to become next prime minister, has made a “do or die” pledge to leave the European Union at the end of October.
His opponent, Jeremy Hunt, has called Oct. 31 a “fake deadline” because it could tip the U.K. into a general election. Still, he said he would leave without a deal “with a heavy heart” if there was no prospect of a better agreement with the EU.
The degree of economic uncertainty over Brexit is currently as high as it was just before the original March 29 deadline, Carney said. “If you squint, marginally it’s gone up a bit.”
(Updates to add Carney comments on no-deal exit from second paragraph.)
