Brexit guidance? Investors pass over Bank of England’s Carney
Many are frantically trying to predict the economic fallout from U.K.’s exit from the EU
Investors are frantically trying to predict the economic fallout from the U.K.’s exit from the European Union. One person they don’t seem to be listening to: Bank of England Gov. Mark Carney.
The Canadian former Goldman Sachs Group Inc. executive has been a prominent voice in a chorus of warnings about the economic and financial dislocation that could result from Brexit. The Bank of England in a report this week suggested a disorderly break with the EU could leave the economy a 10th smaller in five years, potentially triggering the deepest recession since the Great Depression.
“The direction of the effects of a reduction in openness is clear: lower supply capacity, weaker demand, a lower exchange rate and higher inflation,” Mr. Carney said.
The U.K. Parliament is set to vote on a draft separation agreement on Dec. 11. If it is rejected, a deal could be approved via followup votes. But there remains a possibility that no deal is struck and the U.K.’s financial and trading ties with the EU would be abruptly severed on the March 29 deadline.
Investors, and the market, seem ambivalent about Mr. Carney’s warnings, including his suggestion that such an exit could push inflation higher and force the bank to raise rates.
“There is a widespread view that talk from this governor is cheap,” said Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics, a research firm.
Part of the skepticism stems from calls he made ahead of the June 2016 referendum that a vote to leave the EU could push the U.K. into recession. Ultimately, the economy continued to grow and a weak currency propped up the stock market.
The FTSE 100 equities benchmark is up almost 15% since the vote.
“I don’t think he has handled the whole situation very well,” said Neil Dwane, global strategist at Allianz Global Investors.
Bond markets don’t seem to be responding to Mr. Carney’s warnings. Yields, which reflect the government’s cost of borrowing, have dropped sharply even on days when the risks of a no-deal Brexit have risen, and when the governor repeated warnings that he might have to raise interest rates to address a plunging pound.
The National Institute of Economic and Social Research, a nonpartisan think tank, noted that the yield on 10-year government debt dropped to 1.39% from 1.52% on Nov. 15, when six members of the government resigned in protest of Prime Minister Theresa May’s Brexit deal. The researchers found concerns around rising risk were outweighed by expectations of looser monetary policy.
A graduate of Harvard and Oxford universities, Mr. Carney spent 13 years as an investment banker at Goldman Sachs in London, Tokyo, New York and Toronto. He was head of the Bank of Canada before taking the helm at the Bank of England in 2013.
Mr. Carney soon drew criticism for inconsistent communications with markets. One member of Parliament described him as an “unreliable boyfriend,” an epithet that has stuck with his critics.
Some agree with Mr. Carney’s estimates of the potential fallout from a messy withdrawal. It could be a difficult struggle to control inflation and prop up growth if the pound falls and trade comes to a halt.
“Central banks generally have to always make the case for stability and so they are really caught between a rock and a hard place,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham, a private bank.
Inflation is higher now than it was at the time of the referendum, at 2.4% last month, above the bank’s 2% target. Fresh data have triggered concerns that the economy is now stretched, with wages rising 3.2% in the last quarter, the fastest rise since the end of 2008.
“What Mark Carney and the Monetary Policy Committee don’t want the markets to do is simply assume they’ll just redo what they did in 2016,” said David Owen, chief European financial economist at Jeffries.
The Bank of England declined to comment Friday.
At a press conference on Wednesday, Mr. Carney pointed out that the U.K.’s withdrawal from the bloc could hit the economy’s supply side, something the central bank isn’t equipped to tackle.
“Lowering interest rates isn’t going to open a port,” he said.