Bank of England could cut interest rates in event of no-deal Brexit

Mark Carney has indicated that the Bank of England could have to cut interest rates should Britain crash out of the EU without a deal as he said the mounting risks of such a scenario were slowing down growth.

Answering questions from MPs on the Commons Treasury committee on Wednesday, the governor of the Bank said a no-deal Brexit would probably require economic stimulus.

Threadneedle Street can support economic growth by cutting interest rates or using quantitative easing – buying government bonds from commercial banks to pump up the amount of money circulating in the economy.

“It’s more likely we would provide some stimulus” in the event of no-deal Brexit, he told the MPs. “We have said we would do what we could in the event of a no-deal scenario but there is no guarantee on that.”

The Bank has previously said its response to no deal would not be automatic, meaning it could raise interest rates should it need to counter rising inflation caused by a sudden drop in the pound.

Carney said the mounting risk of no deal was increasingly being reflected in the financial markets, such as in the value of the pound and the yield on government bonds.

Boris Johnson, the frontrunner to become prime minister next month, has said he will ensure Britain leaves the EU on 31 October “do or die”.

“Market expectations of no deal have gone up in recent months. There has been a notable increase,” Carney said.

“There is not a business investment boom going on in the country right now. I think we all know why that is not the case,” he added, suggesting that a continuing lack of clarity was holding firms back from investing.

Carney suggested investors in the City still believed that a Brexit deal could be reached, as both Johnson and Jeremy Hunt had expressed preferences for reaching an agreement.

“The market assessment is it’s more likely there is some sort of path to some sort of deal than not. That could change. And asset prices would change accordingly.”

Leading Brexiters have argued that Britain could leave the EU and continue trading on World Trade Organization terms with zero tariffs. But Carney has previously said this would be impossible without agreement.

Under article 24 of the General Agreement on Tariffs and Trade (Gatt), tariff-free trade can continue while the two sides negotiate a permanent future trade agreement. Experts say its usage would require an agreement in principle first.

Carney said an agreement did not necessarily need to be Theresa May’s deal, but something would need to be agreed before Gatt could be used.

“You cannot unilaterally use Gatt 24. There has to be an agreement,” he said.

Michael Saunders, a member of the Bank’s monetary policy committee, told MPs that the UK had previously tracked other major economies’ business investment growth rates. Britain has recorded growth of 1% since the Brexit vote, compared with 12% across the G7 and 16% in the US.

“I suspect that we could under different circumstances have had the same kind of strong investment growth that other G7 countries have had,” he said.

Asked questions about suspensions at the Neil Woodford’s Woodford Equity Income Fund, amid mounting questions over the controversy, Carney called for changes in the global regulation of such funds to address financial stability risks.

“These funds are built on a lie, which is the fact you can have daily liquidity,” the Bank’s governor said. “That leads to an expectation of individuals that it’s no different from having money in a bank.”

Woodford was forced to block investors from withdrawing money from his flagship £3.7bn fund on 3 June as it struggled to dispose of hard-to-sell illiquid assets in order to repay customers.

Carney said rules would be needed to “better align the redemption terms with the actual liquidity of the underlying investment,” which would be “infinitely preferable to the situation we have today”.