Carney Says Brexit Implications for Interest Rates Are Ambiguous

Mark Carney's Parliament Testimony in 50 Seconds

Come March 2019, when the U.K. is due to formally leave the European Union, the Bank of England may have to be ready to move either direction on monetary policy.

How exit negotiations proceed and the extent of any transition -- two big unknowns at this point -- will impact the pound and bonds, supply and demand and, of course, inflation, Governor Mark Carney said in Frankfurt on Tuesday.

Echoing his remarks from the BOE’s Nov. 2 policy press conference, he said the U.K. is in “exceptional circumstances” because of Brexit and real incomes have taken a hit. But the central bank can only support the economy so much in light of the inflation overshoot, hence the interest-rate increase this month.

He also said future moves aren’t set in stone, and it all hangs on how the Brexit talks -- already up against a December deadline -- progress. Here’s his lengthy answer on the two sides of the equation:

“On the moment of Brexit, it will very much depend on what the final arrangement is with the EU-27, and what the transition path is from here to there,” and how those affect demand and supply. “The balance of those effects -- ex ante it’s not clear which direction they go into. Because you could see a balance which is inflationary and there not being that much spare capacity in the economy because capacity has been taken out. You could also see a mix of effects, where there is quite an expansive relationship with Europe, a reasonable transition horizon, not much spare capacity is taken out, the exchange rate and other asset prices rally, demand holds up. But relative to supply, it’s disinflationary. You could paint either picture.”

Carney said he’s very much in favor of a Brexit transition deal to allow a smooth path for businesses and consumers. It would make his job easier, too, he said half-jokingly.

“The real reason why you want a transition arrangement is for businesses and the real economies and financial sector, not because it makes my life more difficult. But it certainly would help. If I could put my vote in for a reasonable transition, I will do so now. Just to be clear, I would like one.”

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