Bank of England Governor Mark Carney warned markets that the U.K. exit from the European Union is the most crucial factor in the welfare of the British economy.
“The assumption of a smooth transition to a new economic relationship with the EU will be tested,” Mr. Carney said at Thursday’s press conference after the central bank governors voted 6-2 to keep rates at their record low of 0.25 percent. 'The most important [factor] is the outcome of the Brexit negotiation,” he noted.
Sterling dropped more than a figure versus the dollar after Mr. Carney's remarks, trading as low as 1.3111 after having touched 1.3268 just prior, the highest it has been against the U.S. currency in eleven months. The pound had recovered to 1.3127 at 1:19 pm in New York.
The BOE reduced its projection for economic growth this year and next to 1.7 percent and 1.6 percent respectively, down from 1.9 percent and 1.7 percent. citing the economic risks from the Brexit negotiations.
Prime Minister Theresa May's political position in the U.K and the Brexit negotiations was diminished after the Conservatives lost their parliamentary majority in the last election.
Today's warning mirrors Mr. Carney's comments in the run-up to the Brexit vote in June 2015. Mr. Carney then said that the U.K. economy would face immediate and dire economic disturbances if the departure referendum were approved.
After approval the bank cut its official rate to its current 0.25 percent but the U.K. economy suffered few economic ill-effects from the prospective end of its integration with the EU. To some degree the economy was bolstered by the precipitous fall in the sterling, nearly 20 percent and the strong performance of British equities in line with the global rally in stocks over the past nine months.
Inflation is also running well above the banks 2 percent target. In June the rate was 2.6 percent. If it continues it could elicit a stricter monetary stance from the bank,
But is it the potential reduction in EU market access for British products and services that is the greatest concern to the governing board. Of course any restrictions in British exports to the continent would likely be met by similar restrictions on EU trade into the UK.
The obvious reciprocity of the cross-channel economic relationship seems to have been ignored in much of the recent commentary from both sides of the Brexit negotiations.
Carney said that currently, the bank does “not see any material evidence...that the transition would be anything but smooth,” but with at least a two year negotiation process in train there is will be plenty of opportunity for sensible economic positions to be subsumed heated political rhetoric.
Chief Market Strategist
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