With a referendum on Britain’s European Union membership looming, the Bank of England governor has spent months trying to skirt the highly charged debate. An appearance before lawmakers this week may throw him right in, as happened in the buildup to the Scottish independence vote when his comments were hijacked by campaigners from both sides. The stakes are high, with Goldman Sachs and BlackRock among those warning the vote puts trade, hiring and investment at risk and many economists saying the full implications of an exit are almost impossible to quantify.
While Carney has said there’s little evidence of an economic impact so far, some surveys are signaling the uncertainty is already having a detrimental effect. “The governor will simply have to give a view,” said Philip Shaw, an economist at Investec Securities in London. “It’ll be very difficult to avoid specific questions about trade access and the potential impact on growth, inward investment, the prospects for the financial sector. He’ll be fairly frank, I don’t think there’s any avoiding it.”
Carney and Deputy Governor Jon Cunliffe will testify at Parliament’s Treasury Committee on Tuesday on the economic and financial costs and benefits of EU membership. In a report in October, the central bank considered the impact of membership on its mandate, but didn’t give a detailed assessment of the merits or the implications of an exit.
Point-scoring
That hasn't stopped political point-scoring, with Chancellor of the Exchequer George Osborne hailing the document as being in line with the government's thinking that the UK should remain. Euroskeptic lawmaker and Treasury Committee member Steve Baker said the same document was a "clear warning" about the risk of power transfer to Brussels.
Last month, Prime Minister David Cameron hinted he wants to see the BOE go further with its analysis, saying it should "set out the figures so people can make a judgment." "It's a political forum -- the questions will be quite wide-ranging and that could be difficult for him," said Ross Walker, an economist at Royal Bank of Scotland Group Plc in London. "His language will be cautious and technical and maybe a bit dry, but in terms of identifying the risks, that might tend to reinforce the view of someone who is more cautious about a UK exit."
Trade and foreign investment may feature strongly at the hearing, with EU countries making up seven of the UK’s 10 largest export destinations. While UK goods exports to the bloc fell in 2015, they still amounted to £134 billion ($190 billion), almost three times the level of sales to the US, and 10 times as much as goes to China. Contingency planning may also feature.
While Carney has said the BOE is considering what actions it would take in the event of a “Brexit,” he’s declined to reveal any details. That mirrors the central bank’s actions in the run up to the Scottish referendum, when officials waited until after the event to give an insight into their planning. Back then, policy makers were ready to introduce cash auctions to help liquidity and provide extra bank notes. They also discussed the implications of a breakup for the UK’s credit rating.
With an EU withdrawal increasing the chances of a UK recession, that also raises the odds the BOE would have to respond with an interest-rate cut or some form of stimulus. “The bank would be looking at this as a macroeconomic shock,” said James McCann, European economist at Standard Life. “It’s something that creates a huge amount of uncertainty, because upon ‘Brexit,’ then you would undergo a two-year period of renegotiation before you fully understood what your new relationship was with Europe. Obviously Europe is a large trading partner, so I think the bank would see it as something that needs policy easing.”
Bloomberg
