World / Politics

Bank of England chief goes further than U.K. government in gloomy Brexit analysis

Bloomberg

Bank of England Gov. Mark Carney has never shied away from doomsday Brexit warnings, but in his latest analysis he has gone further than ever.

While the BOE and the government both assume the economy could be as much as 11 percent smaller than if the U.K. remains in the European Union, the pace of the decline is far more rapid in the central bank’s scenario. It also sees the pound in an unprecedented collapse to below parity with the U.S. dollar.

The dire assessments come before Prime Minister Theresa May’s Brexit deal faces a key vote in Parliament next month. With the agreement facing criticism from all sides, there are doubts over her ability to get it passed, and she’ll be hoping the stark analysis of a disorderly scenario may be enough to change some people’s minds.

For the Treasury, the gap between economic output under the baseline and no-deal Brexit reaches a maximum of 10.7 percent after 15 years. For the BOE, it gets to 10.5 percent within five years, three times as fast.

The question is whether Carney’s latest intervention will make any difference. The Canadian is often dismissed for being overly gloomy on the U.K.’s prospects by anti-EU politicians. He is also tarred by the perception in some quarters that forecasters got their predictions wrong before the 2016 referendum, an allegation he rejects.

Within minutes of Wednesday’s release, Brexiteers were lining up to criticize Carney. Jacob Rees-Mogg, who dubs the governor the “high priest of project fear,” said he had failed to understand his role, while former Cabinet Minister Priti Patel accused the BOE of “undermining its credibility and independence by giving such prominence to these extreme economic forecasts and scenario.”

The most eye-catching part of the BOE’s analysis was a worst-case scenario that saw the economy shrink by 8 percent within a year and property prices plunging almost a third — while creating a supply shock that would potentially necessitate aggressive interest-rate increases.

Criticism was not limited to the political sphere, with former BOE official Andrew Sentance — and even Nobel laureate Paul Krugman — expressing doubts about the models.

For his part, Carney stressed that he has a responsibility to protect the economy and to share his analysis when Parliament asks for it. He went to great lengths to explain the scenarios are unlikely and that he wasn’t making forecasts — something he described as “the f-word.”

“Our job is not to hope for the best but to prepare for the worst,” Carney said at the press conference. “If there is one thing that you take from an avalanche of papers and numbers and the discussion today, it’s that the core of the U.K. financial system is ready for Brexit, whatever form it takes.”