Bank of England's Carney Appears to Back UK Staying in the EU

Mark Carney, governor of the BOE, was mildly supportive of remaining in the E.U in a testimony to parliament on Tuesday.

BOE Governor Mark Carney and Head of Financial Stability Sir Jon Cunliffe addressed the Treasury Committee on Brexit today, where they were asked probing questions about the Bank’s view on the economic impact of the referendum and the possibility of the U.K leaving the E.U.

His answers were broadly interpreted as mildly pro-EU by the media with Chris Giles and Emily Cadman of the Financial Times writing

“In evidence to MPs the BoE governor said membership had improved economic dynamism and prosperity, and that leaving would create financial stability risks. Some City firms would have to leave the UK in the event of Brexit, Mr Carney added.”

In a research note, Vicky Redwood of Capital Economics, wrote: 

“His comments might nonetheless be interpreted as mildly pro-EU. Indeed, their tone was similar to the speech he gave a few months ago, which was viewed that way. Notable comments were that a Brexit might prompt some financial services activity to relocate from the UK; that risk premia on UK assets might rise after a Brexit; and that the Government’s EU deal mitigated some of the financial stability risks from staying in the EU.”

The BOE took the decision on the day before the testimony to publicize contingency plans which would offer banks emergency liquidity in the event of a financial crisis from a vote to leave the E.U in June.

Whilst this was criticised by euro-sceptics as part of ‘project fear’ – an attempt to frighten people into voting to stay – the same contingency plans were made before the Scottish referendum, only they were not publicized then.

Impact on Monetary Policy

On the subject of how a Brexit might impact on Monetary Policy, however, Carney was adamant that it would dissuade the BOE from its chosen course:

“He did not suggest that a Brexit would affect monetary policy in a big way, in either direction.”

Whilst he conceded that in the event of a Brexit, which would probably cause a sharp drop in the pound, the resulting rise in the cost of imported goods would increase upward pressure on inflation, this might be offset by a negative impact from a drop in business investment, which could have a negative impact on the economy, jobs, income and spending:

“But he also said that if the reasoning for the weakening was greater uncertainty, then lower investment and consumer spending would put offsetting downward pressure on inflation.”

As a result there was, “no clear steer on which direction interest rates would go after Brexit.”

Finally, Carney was broadly supportive of David Cameron’s revised membership deal, which he argued mitigated some of the financial stability risks which the BOE had voiced about membership of the E.U, saying in his statement that:

“The settlement explicitly recognises the needs of the UK to supervise its financial stability, while not impeding the implementation of necessary, further integration among members of the euro area,”

And:

“It recognises that there is more than one currency in the EU and makes a legally binding commitment to ensure non-discrimination in the single market on the basis of currency.”

Carney added that E.U membership, “magnifies” Britain’s influence over global financial regulation.

The BOE governor further added that a Brexit would “without a doubt,” cause a loss of business to the city.