BoE: UK faces a high risk of no-deal Brexit

Cyprus Today - - UK -

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”.

Mark Car­ney

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