Carney, Probed on Brexit, Sets Out Pound's Impact on Inflation

The Brexit Debate: What Happens if the U.K. Leaves the EU
  • BOE releases `mechanical exercise' showing pound's influence
  • Carney says BOE not forecasting markets in event of Brexit

Bank of England Governor Mark Carney re-engaged in the debate over whether the U.K. should leave the European Union by releasing calculations for what a slide in sterling could do to the economy.

In what he called a “mechanical exercise” rather than a forecast, Carney said a 10 percent shift in the pound’s effective exchange rate likely has a 0.75 percentage point impact on annual inflation after two to three years.

The number-crunching was conducted as some economists predict that voters would send the pound tumbling if they vote to leave the EU in the June referendum -- a so-called Brexit.

Carney was responding to lawmaker requests to study what that could mean for the exchange rate, although he noted there is no “simple relationship” between the currency and inflation.

“The results obtained from this sort of exercise can be useful to forecasters -- particularly when the underlying drivers of the economy are hard to identify in real time -- but they necessarily present a partial picture of future developments and come with strong caveats,” Carney said in a letter to Andrew Tyrie, who chairs Parliament’s Treasury Committee.

The pound gained this week as investors suggested concerns over a possible Brexit are starting to look overdone. In his letter, Carney again noted the BOE has not made a prediction for what may happen to the economy or in financial markets if Britain quits the 28-nation EU.

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