Carney remarks on draft Brexit deal offer some support to PM May

The governor of the Bank of England has offered support to Prime Minister Theresa May's Brexit deal with the EU.

Mark Carney said that, in particular, he welcomed a 20-month transition period immediately after the UK leaves the EU in March next year.

He told MPs (BSE: MPSLTD.BO - news) on the treasury select committee: "We have emphasised from the start the importance of having some transition between the current arrangements and the ultimate arrangements.

"So we welcome the transition arrangements in the withdrawal agreement and take note of the possibility of extending that transition period."

Michel Barnier, the EU's chief Brexit negotiator, has proposed to the remaining 27 EU members that the transition period be extended to 2022.

Mr Carney said that, in his experience, little happened in the EU before or after the European Parliamentary elections and that, with the next elections being held in the spring, there was "a very limited window" to negotiate an extension to the transition period.

He added: "It would appear wise to very carefully and objectively and transparently consider how long it is likely to take all aspects of the new economic partnership and implement it.

"The average for a trade deal, from start to finish, is something of the order of four years and the implementation period is a little over half that period of time."

Rushanara Ali, Labour MP for Bethnal Green and Bow (Shenzhen: 300070.SZ - news) , asked Mr Carney whether there was a risk that, should the transition period be extended, the UK's eventual Brexit bill would exceed the agreed £39bn.

He replied: "If there's a cost to the transition extension, it's weighed against the economic return. But that's truly for the chancellor to answer.

"In terms of business investment, there was another fall in the third quarter. What an agreement, particularly one with transition and with some expectation of a deep economic partnership over time, would provide is greater clarity to business and that would support investment over time.

"We are in the process of putting together a scenario that assumes that will happen."

Mr Carney said it was possible that the financial sector could be "fully transitioned" over the 20-month period set out in the prime minister's proposed deal with the EU - but warned "that is not true for all sectors".

He added: "I know some people think it is easy."

The governor also repeated his warning that interest rates could rise even in the event of the economy taking a hit from a "no-deal" Brexit.

Asked by Charlie Elphicke, the suspended Conservative MP for Dover, whether he was more likely to vote for interest rate cuts or rises in the event of a no-deal Brexit, Mr Carney said: "It depends on the implications for supply and demand and the exchange rate.

"One, this would be a very unusual situation - it is very rare to see a major negative supply shock to an advanced economy…we would have to stretch back to the 1970s [to see something similar].

"My second point is that the initial position of this economy is different from the referendum, when we had excess supply.

"We basically have the economy operating at full capacity and at the end we have the primacy of the inflation target in our remit.

"If the economy moved further into excess demand because of the weight of spending was maintained or accelerated and we had the prospect of additional inflation, and sterling was to depreciate at a time when we had some expectation of supply being reduced for a period of time, that is a position when you would expect monetary policy to be tightened."

Asked by Mr Elphicke whether this meant no-deal would automatically lead to interest rate rises, Mr Carney replied: "We will manage monetary policy to achieve our 2% inflation target and supply support as we can to the economy to help it through.

"[With (Other OTC: WWTH - news) ] a no-deal no-transition Brexit, the issues will be in the real economy, how the logistics system works, how business confidence holds up.

"[But] this is not the financial crisis round two, where the Bank of England and other central banks were centre-stage.

"This is a real economy shock, and therefore central banks have a role, but we're more of a sideshow."

His comments were backed by other members of the Bank's rate-setting Monetary Policy Committee (MPC).

Michael Saunders, an external member of the MPC, said the committee would respond to Brexit after assessing the impact on supply demand and the exchange rate of the pound.

He added: "An early move to WTO (World Trade Organisation) rules, with no transition, would be a major supply shock.

"If you have queues at Dover, the answer is not lower interest rates."

Sir Jon Cunliffe, the Bank's deputy governor for financial stability, said: "We can't be precise now about particular Brexit outcomes will measure up against people's expectations. I think it is an unprecedented situation."

And Andy Haldane, the Bank's chief economist, added: "At the referendum, it was the expectation of some disruption to the supply side of the economy [that sparked the Bank's response].

"This would be the reality, whether that is the ports or more broadly. We would most likely see some immediate hit to supply side and that makes for a different monetary policy scenario."