Carney’s change of tack on Brexit started in February
AT FIRST, Carney seemed willing to leave the Brexit debate to others.
What followed instead was a bout of verbal intervention that made the Bank of England governor a target of ire by exit proponents and a key figure in the intensifying campaign for the UK to remain in the European Union.
The crux of the turnaround was a drop in the pound amid a growing international chorus warning about the consequences of leaving the 28-nation bloc. Carney’s change of approach began in late February, as polls showed a bounce in favor Brexit, with the governor joining Chancellor of the Exchequer George Osborne in Shanghai for a meeting of counterparts from the world’s 20 biggest economies.
“On the one hand, they didn’t want to say anything,” said Danny Blanchflower, a former member of the BOE’s Monetary Policy Committee. “On the other, they felt like they had to do something.”
The week that would be sterling’s worst since 2009 began with the ruling Conservatives fracturing over Brexit. On Feb 21, the day after Prime Minister David Cameron set the vote date, Boris Johnson, one of the party’s most high-profile politicians, declared in favour of leaving the EU. As the currency plunged, Carney committed to sidestepping the argument.
“We are not making a judgment about the potential outcome of the referendum – in other words, which side will win – or an assessment of the potential consequences of a leave vote,” Carney told law makers on Feb 23. He began to tip his hand, though, saying it was “increasingly clear” that the market jitters were related to the referendum.
Three days later, with the pound languishing at the weakest since he became chancellor, Osborne was lobbying the Group of 20 countries to warn about the risks around the vote. International Monetary Fund Managing Director Christine Lagarde was already on record saying a UK exit would be “negative on all fronts.”
For both the governor and the chancellor, the currency matters. A weaker pound lifts inflation and may up the pressure for tighter monetary policy sooner than would otherwise be warranted; it could also be a harbinger of serious economic woes. Sterling’s low point was at US$1.3836 on Feb 29, a drop of about 10 per cent since the start of November.
“As an economist, which is ultimately what he is, it’s impossible to ignore that sort of movement,” said James Rossiter, an economist at TD Securities and a former BOE official. “You really do need to provide some insight and opinion on how that’s affecting the economy.”