A collapse of Brexit talks resulting in the UK leaving the European Union without a transition agreement would likely prompt the Bank of England to loosen monetary policy, Governor Mark Carney said.
While the Monetary Policy Committee’s reaction would depend on how demand, supply and exchange rate are hit, “the appropriate policy path would be more likely to ease than not,” Carney said in a speech at the Federal Reserve Symposium in Jackson Hole.
Prime Minister Boris Johnson has vowed to take Britain out of the bloc on October 31 with or without a deal for a transition period. The perceived risk of leaving without new arrangements has increased, Carney noted, but he also said reaching an agreement was still possible and that it is the stated preference of both the UK and EU.
The UK economy is now roughly in equilibrium, but global trade tensions and Brexit are “two large, volatile forces” that could upset the balance. Weak business investment is the biggest headwind to growth, he said.
“There is overwhelming evidence that this is a direct result of uncertainties over the UK’s future trading relationship with the European Union,” he said. “It serves as a warning to others of the potential impact of persistent trade tensions on global business confidence and activity.”