Carney cautions on economic risks of Brexit

9 Mar 16

The prospect of Britain leaving the European Union following the upcoming referendum represents the “biggest domestic risk” to the economy, the Bank of England governor Mark Carney has warned.

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Appearing before the Treasury select committee yesterday, Carney warned that leaving the EU could create economic uncertainty, although he stated that remaining in the economic bloc after the June 23 vote also carried risks.

“This issue is the biggest domestic risk to financial stability, because in part of the issues around uncertainty and also because it has the potential – potential depending on how these issues can be addressed – to amplify risks around the current account, potential risks around housing, potential risks around market functioning that we’re trying to mitigate.”

However, he added that membership of the union also contained risks, with the principle issue being what he called the “unfinished business” of European monetary union and the impact of the economic downturn in the currency bloc on the UK.

In a letter to committee chair Andrew Tyrie ahead of his appearance, Carney said that, to the extent it increases economic and financial openness, EU membership reinforces the dynamism of the UK economy.

“A more dynamic economy is more resilient to shocks, can grow more rapidly without generating inflationary pressure or creating risks to financial stability and can also be associated with more effective competition,” he wrote.

However, increased economic and financial openness means the UK is also more exposed to downturns from overseas, Carney went on.

“In recent years, as a result of closer integration with the EU and, more recently, with the euro area, this may have increased the challenges to the UK economic and financial stability.”

Carney also said confirmation in prime minister David Cameron’s renegotiation that EU states outside of the eurozone will not need to play any role in the European Stability Mechanism, which is intended to provide funding for any future bailouts, was welcome.

“On balance, these fiscal protections enhance the financial stability of the UK,” he wrote.

The bank also confirmed on Monday that it would offer three additional periods of extra lending to banks in order to tackle any financial uncertainty as a result of the referendum.

Banks will be offered three additional periods to sign Indexed Long-Term Repo agreements in the weeks around vote.

The ILTR scheme allows banks and building societies with an opportunity to access liquidity held by the Bank of England by offering collateral, and is intended to ensure they have enough resources to deal with any market turbulence. These three periods will be in addition to the regular one a month window, the BoE said.

Responding to the announcement, Will Straw, campaign director for Britain Stronger in Europe, said this was a warning about the impact of a vote to leave.

“We’ve already seen the sensitivity of the pound to the prospect of leaving the EU and now we learn about the very real prospect of lending drying up. When the Bank of England issues this kind of warning, everyone should sit up and listen,” he said.

However, Matthew Elliott, chief executive of Vote Leave, said Carney made clear there are financial risks to Britain voting to stay in the EU.

“As the previous governor Lord King has warned, the euro is likely to ‘explode’. If we vote to remain our money will be used to bailout the euro when it next hits crisis point,” he added.


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