Bank not predicting a property market crash if no EU deal – Carney
Mark Carney has said that the Bank of England is not predicting a property market crash in the wake of a no-deal Brexit, as the head of the central bank sought to clarify a doom-laden briefing given to cabinet on Thursday.
The bank governor said the housing slump and a number of grim outcomes, including a double-digit unemployment rate, were worst-case scenarios used in stress tests for British banks, which are designed to ensure no rerun of the 2008 financial crisis.
Carney told an event in Dublin “that’s not a prediction of what is going to happen”, a day after it emerged that he had told a special meeting of the cabinet that house prices could fall by 35% in a disorderly, no-deal Brexit in which there was minimal cooperation between the UK and the EU.
It is understood that was the worst of three no-deal scenarios presented to cabinet and is in line with the Bank’s 2017 stress-test scenario that also envisaged unemployment hitting 9.5% from the current level of 4% and interest rates more than doubling to 4% from a level of 0.75% today.
The Bank’s no deal economic forecasts were going to have been made public around November, to inform MPs who will have to vote on whether to approve whatever Brexit deal Theresa May negotiates with Brussels. But to No 10’s frustration, they leaked from the special cabinet meeting, where Carney’s gloomy predictions were endorsed by the chancellor, Philip Hammond.
Yesterday Carney said the banks were tested against such scenarios in order to help the financial system “plan for the worst”. The results of the stress tests were published last November, and updates will be published in November 2018.
Carney said the Bank’s stress testing – among several preparations made for a hard Brexit – had not amounted to a forecast for the economy.
The governor had been invited by May to update ministers on the Bank’s preparations for ministers failing to reach a deal with Brussels; he attended part of the three-and-a-half-hour cabinet meeting before departing.
“We have been working on making sure that those institutions that we continue to supervise [the banks], they’re prepared for all potential contingencies. Central to that has been stress-testing those institutions to severe outcomes,” Carney said.
“That is what you need to do in order to make sure that in the better states of the world that the [banking] system is very clearly and transparently ready for [a harsh scenario] and able to continue to lend.”
The governor used his speech to warn that the Bank needed to “hope for the best but to plan for the worst” amid mounting concerns over a nodeal Brexit, with less than 200 days before Britain leaves the EU on 29 March. Interest rates might need to change in response, he added.
Carney said the response to a nodeal Brexit would not be automatic, and would depend on the balance of demand and supply in the economy, as well as the level of sterling on foreign exchanges.
Carney had told MPs last week that a no-deal scenario could trigger a renewed drop in the value of the pound, causing higher inflation and squeezing British workers’ wages.
“It is likely the real income squeeze will return for households across the country,” he told the commons Treasury committee.
The governor agreed last week to continue in his post until the end of January 2020, angering Brexiters who have criticised his warnings for economic growth and living standards were Britain to leave the EU.
▲ Mark Carney said the banks were tested to help plan for the worst