Bank warns economic shock if Brexit talks fail

LONDON — The Bank of England warned Thursday that Britain could suffer an economic shock if it crashes out of the European Union without a deal, saying it could cause gridlock at ports and an inflation-rearing fall in the pound that could require higher interest rates.

After the bank decided to keep its main rate at 0.75 percent, Governor Mark Carney said the British economy’s supply capacity — that is, what the country is able to produce — could “fall sharply” in case of a disorderly Brexit.

“An abrupt and disorderly withdrawal could result in delays at borders, disruptions to supply chains, and more rapid and costly shifts in patterns of production, severely impairing the productive capacity of some U.K. businesses,” he said.

Carney said policymakers would have to try to work out which of the changes were short-term — caused by logistical challenges related to the end of free movement of goods and services, for example — and which would affect the economy in the longer-term.

“There are scenarios where policy would have to be tightened,” Carney told a news conference, while adding that a no-deal Brexit is “not the most likely scenario.”

Many economists doubt the central bank’s initial response to a disorderly Brexit would be to increase rates. After the 2016 referendum, when the pound had fallen, the bank cut rates.

The Bank of England, which has raised its key rate twice over the past year, is more likely to slash its benchmark rate to zero, economists say. And it could add stimulus by buying corporate bonds.

Carney’s comments come as Prime Minister Theresa May struggles to keep her divided Conservative Party in check in the Brexit discussions.