Bank of England governor, Mark Carney, issued a stark warning on Tuesday that his central bank would not be able to rescue the UK from the huge economic shock of a Brexit with no deal and no transition period.
“This is not the financial crisis … round two, where the Bank of England and other central banks were centre stage,” he told the UK’s Treasury Select Committee. “This [could be] a real economy shock and, therefore, central banks have a role, but we’re more of a sideshow.”
Carney said his central bank has been making all the necessary preparations to ensure the financial system can continue to operate smoothly in the unlikely event of a no-deal Brexit in March 2019, in which there is no agreed transition period. The Bank of England will work to keep inflation around its 2% target and provide support to the economy, if necessary. But, in essence, Carney said the central bank can’t save the economy from itself.
Carney said the UK economy will depend upon whether logistics systems can continue to operate smoothly. This refers to logistics surrounding the delivery of things like food and medical goods. He also said business confidence would play a big role in the direction of the economy after Brexit.
Central bank tools such as inflation rates and stimulus programmes wouldn’t protect the economy from a severe shock, he said.
Michael Saunders, an economist at the Bank of England and member of the team that sets interest rates, backed up Carney’s assertion: “If you have queues at Dover, the answer is not lower interest rates,” he told the committee.
Carney’s comments come as Brexit draws nearer and prime minister Theresa May struggles to convince the majority of lawmakers to approve her draft Brexit deal with the European Union, which she finalised last week.
Brexit is scheduled for late March 2019 and there are plans for a short transition period until at least the end of 2020. But a transition period is not a sure thing until both the UK and EU ratify a deal.
Many members of parliament have indicated they’ll vote against May’s Brexit agreement, while others are calling for a second Brexit referendum. A number of MPs within her own party have called for a no-confidence vote to oust May. And UK Labour party leader Jeremy Corbyn called for a general election on Monday.
The Democratic Unionist Party (DUP), which has 10 lawmakers who previously agreed to support May’s minority government during key votes, has warned May to keep her side of the Brexit bargain. The DUP considers some of the plan’s specific provisions as having the potential to separate Northern Ireland from the rest of the UK. In protest against the Brexit deal, the DUP on Monday night decided not to vote on a series of amendments to the finance bill.
These political moves all raise the risk of a no-deal Brexit, with no transition period.
“We have emphasised from the start the importance of having some transition [period] between the current arrangements and the ultimate arrangements,” Carney said Tuesday. “We welcome the [draft Brexit deal’s] transition arrangements.”