BoE: UK faces a high risk of no-deal Brexit
BANK of England Governor Mark Carney said yesterday Britain faces an “uncomfortably high” risk of leaving the European Union with no deal, comments that drove sterling to an 11-day low against the dollar.
With less than eight months until Britain quits the EU, the government has yet to agree a divorce deal with Brussels and has stepped up planning for the possibility of leaving the bloc without any formal agreement.
“I think the possibility of a no-deal is uncomfortably high at this point,” Mr Carney said in an interview with BBC radio.
“People will have things to worry about in a no-deal Brexit, which is still a relatively unlikely possibility but it is a possibility.”
Sterling slid below $1.30 on the comments and touched a low of $1.2985, while British government bond prices rose.
If Britain fails to agree the terms of its divorce with the EU and leaves without even a transition agreement to smooth its exit, it would revert to trading under World Trade Organisation rules in March 2019.
Most economists think that would cause serious harm to the world’s fifth largest economy as trade with the EU, Britain’s largest market, would become subject to tariffs.
“Parties should do all things to avoid [a no-deal Brexit],” Mr Carney said.
Prime Minister Theresa May must find a way to strike a deal with the EU, which has already rejected her preferred plan on trade, then sell that deal to her deeply divided Conservative Party, before putting it to a vote in parliament. Failure at any of those three hurdles could cost Mrs May her job.
Mr Carney said consumer prices would likely rise in the case of a no-deal Brexit as companies enacted contingency plans to keep supply chains operating.
On Thursday the BoE raised interest rates to a new post-financial crisis high of 0.75 per cent but signalled it was in no hurry to raise them further.
Mr Carney hinted yesterday that interest rates are likely to rise to around 1.5 per cent over the next three years, based on the expectations of financial markets.
“That’s not a prediction, that’s not a guarantee, but that’s not a bad rule of thumb given the current state of the economy and the momentum in the economy,” he told the BBC.
Sterling has lost almost 10 per cent of its value since hitting a post Brexit-referendum high in April, amid worries that Britain will fail to secure a trade deal before it exits the EU in March.
London and Brussels, as well as members of Mrs May’s government, remain far apart on what the future trading relationship should look like.
“Its a slightly more hawkish rate hike than expected,” said Kallum Pickering, a UK economist at Berenberg. “It’s all about Brexit for sterling now.”
The market is pricing in the next rate hike for September 2019, based on the money market “Sonia” curve, Société Générale fixed income strategist Jason Simpson said. In making its predictions, he said the market was “whacking in some big assumptions like a smooth Brexit”.