Bank of England governor Mark Carney spelled out his criticism of a central pillar of Tory leadership front-runner Boris Johnson’s Brexit strategy.
Johnson has argued that the UK should try to strike an agreement with the European Union to continue tariff-free trade in the case of a no-deal Brexit. It’s a strategy that would rely on article 24 of the General Agreement on Tariffs and Trade, which allows two countries working toward a free-trade deal to maintain existing arrangements as they do so.
Carney said that such an arrangement wouldn’t be a no-deal Brexit, because it would require the consent of both sides. The EU has repeatedly ruled out making any such mini-deals in the place of a comprehensive Withdrawal Agreement.
The use of the arcane regulation has become a point of contention between Carney and Johnson since the former criticised it in a radio interview last week. Johnson pushed back on Tuesday, saying the measure still offered a “hopeful prospect” and was “the way forward,” prompting a question on the topic during Carney’s appearance before Parliament’s Treasury Committee.
“You can’t unilaterally use GATT 24,” Carney told lawmakers. “There has to be a degree of mutuality in it, that you are working toward free trade or a customs agreement.”
Carney is not alone in his criticism. The use of the article has been dismissed by pro-Brexit International Trade Secretary Liam Fox and World Trade Organisation director-general Roberto Azevedo because article 24 would require a bilateral agreement between the UK and EU to apply.
The EU has also said it won’t contemplate such agreements, although Dominic Raab, a supporter of Johnson, told BBC Radio yesterday he thought the bloc would nonetheless agree to it.
The governor, who steps down from his role at the end of January, also pushed back on the idea espoused by some supporters of a no-deal departure that it could boost investment by providing clarity.
Policy maker Ben Broadbent said last month that surveys indicate firms are most worried about the prospects of a no-deal, no-transition Brexit, and pursuing such an option merely to end uncertainty wouldn’t lead to a pick-up in their spending.
“Uncertainty is a euphemism for the downside risk,” Carney said. “Crystallisation of that downside risk would have an economic impact” that “would involve a degree of capital scrapping.”
The BoE said at its June 20 meeting that, if the economy evolves as forecast, limited and gradual rate hikes will be needed to control inflation. That outlook, which is based on government policy to pursue a smooth Brexit process, is starkly at odds with financial markets, where the possibility that the UK will leave the EU without a deal has pushed the pound lower and prompted investors to start pricing in rate cuts.
Still, the three-century old central bank stands ready to alter the economic assumptions behind its interest-rate stance if the government changes its Brexit policy, Carney said.
He acknowledged there is a “natural tension” between the BoE’s assumption of a smooth departure and markets that are pricing in the possibility of a no-deal divorce, and said that while the latter is not seen as the most likely scenario, investors expectations for such an outcome have risen.
“In the event that there is progress toward a deal, the committee forecast becomes very relevant,” he said. “In the event that the government switches policy, the BoE would switch.”
Johnson has made a “do or die” pledge to leave the European Union at the end of October, and his opponent, Jeremy Hunt, has called October 31 a “fake deadline” because it could tip the UK into a general election.
Still, he said he would leave without a deal “with a heavy heart” if there was no prospect of a better agreement with the EU.
If the UK does crash out of the bloc, Carney said he sees a greater chance of additional stimulus but reiterated that there are “no guarantees” and interest rates could rise.
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