Brexit makes Carney less of a central bank oddity

Shoaib Ur Rehman August 1, 2019

LONDON: Sticking out like a sore thumb is sometimes better than fitting in. Right now, Bank of England Governor Mark Carney would be forgiven for preferring the former to the latter.

Carney is, like everyone, in the dark about whether Britain will crash out of the European Union.

Remove that risk and he might be raising interest rates. Instead he left them unchanged at 0.75pc on Thursday.

That reduces the disparity with the likes of European Central Bank President Mario Draghi, who has hinted at more easing, or Federal Reserve boss Jerome Powell, who cut US rates on Wednesday.

For the time being, Carney can neither join them nor move in the opposite direction.

The UK unemployment rate is at 44-year lows, annual pay growth has been relatively strong, consumer spending is growing at a solid pace, and growth could rebound if there’s a smooth Brexit.

But there’s no knowing how badly the economy will be hit if Britain leaves the EU without a trade deal.

One indicator of business investment intentions is already at its lowest since 2010, the Bank of England points out.

And a hard Brexit may entail considerable economic disruption. Most of the 240,000 UK businesses that trade solely with the EU have not yet taken even the first of a series of actions needed to be ready for inspections at the border’s blocs, the central bank said.

Even companies that believe they are ready for a no-deal scenario expect such an outcome would depress output, employment and investment over the next year.

While an orderly Brexit would make a rate rise more likely, it’s unclear that a chaotic one would automatically mean a rate cut. The second scenario would result in a drop in sterling, which would generate price pressures.

So would the likely reduction in supply capacity. But the damage to demand would pull inflation in the opposite direction. It’s not yet certain which would be the stronger force.

Until he knows how things will pan out, Carney is in limbo. He’d much rather be the odd man out.

Copyright Reuters, 2019

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