By David Milliken and William Schomberg
LONDON (Reuters) – The Bank of England could pump more stimulus into Britain’s economy if this year’s Brexit negotiations result in a bad deal, BoE governor Mark Carney said on Thursday.
While the BoE expected a smooth transition, investors should look at its response to the shock referendum decision in 2016 – which included an interest rate cut and more bond-buying – for a sense of how it might react to a “disorderly” Brexit, he said.
Britain is due to leave the EU in March next year but the terms of its new relationship with its most important trading partner remain unclear. Prime Minister Theresa May’s ministers are divided on what kind of Brexit they should pursue.
“A more disorderly transition, or a materially different end state from our assumption, would have implications for monetary policy,” Carney said in a speech to the Society of Professional Economists in London.
Businesses, households and investors should look at how the BoE moved to support the economy, and allowed inflation to run above its 2 percent target, after the referendum “since exactly the same framework would apply,” he said.
The BoE cut borrowing costs to 0.25 percent after the 2016 Brexit vote and increased the size of its bond-buying programme by 60 billion pounds to 435 billion pounds. It also launched a plan to buy 10 billion pounds of corporate debt and a scheme to encourage banks to lend at low rates.
“Although the exact policy response cannot be predicted in advance, observers know from our track record that, in exceptional circumstances, we are both willing to tolerate some deviation of inflation from target for a limited period of time and that there are limits to that tolerance,” he said.
The BoE reversed its initial post-Brexit vote rate cut in November when it raised rates back to 0.50 percent.
It has said it plans to continue raising rates gradually but this month it held off while it waited to see if a slowdown in the economy in early 2018 was temporary due to an unusually cold winter in Britain.
In the event of a smooth Brexit, the speed of rate hikes would depend on the strength of demand in the economy and could prove faster than the recent assumption in financial markets — of three hikes over the next three years — if investment proves surprises to the upside, Carney said.
“From a monetary policy perspective, the Bank is ready for Brexit,” he said. “The MPC is well-prepared for whichever path the economy takes. We have the tools we need. We will be prudent not passive.”
(Writing by William Schomberg, Editing by Angus MacSwan)