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Bank of England governor: Brexit could trigger recession

by Sam Ashworth-Hayes | 12.05.2016

Battle is well and truly joined. While Vote Leave is threatening ITV, the governor of the Bank of England, Mark Carney, has decided to engage in some straight talking. Carney said on Thursday that a vote to leave the EU could trigger “a technical recession”, and that the Bank of England wouldn’t be able to offset all the damage.

‘Technical’ is not synonymous with ‘painless’. A recession would mean at least two consecutive quarters of negative economic growth; the economy wouldn’t just slow, it would shrink.

In addition to dropping the R-bomb, Carney warned of a toxic mix of consequences. Sterling would fall, “perhaps sharply”, boosting inflation, while investment and consumption could shrink. This could lead to materially lower growth and higher inflation, he said, leaving the Bank with a tricky decision: should it lower interest rates to boost growth, accepting the erosion of inflation-adjusted savings and pay, or should it raise rates to keep a lid on prices, at the cost of watching the economy shrink further?

Whichever path the Bank chooses, some will lose out. As Carney says, “Monetary policy cannot immediately offset all the effects of a shock.”

The Bank scattered several other warnings in the main body of its quarterly inflation report. A vote to leave could trigger prolonged uncertainty, as the UK’s future trading arrangements “would take some time to renegotiate”. There are signs that the referendum “has already begun to weigh on certain areas of activity”.

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Brexit uncertainty “would tend to push up risk premia”, as InFacts has already pointed out. Funding costs for banks could go up, as would borrowing costs for homeowners and consumers. The UK’s current account deficit is high, and a weaker outlook for the British economy “could call into question” our ability to finance it by attracting savings from abroad, with further consequences for growth.

In giving this warning, the Bank of England joins the National Institute for Economic and Social Research, the Treasury, the OECD, the IMF, and the London School of Economics in saying leaving the EU would be bad for the economy.  Arrayed against these big guns, Vote Leave has fired back with a pop-gun reassurance from Cardiff University economics professor Patrick Minford that the UK economy would in fact prosper outside the EU. They clearly haven’t convinced Mark Carney.

This article has been updated to change the incorrect ‘trading negotiations’ to ‘trading arrangements’ in paragraph 5.

Edited by Alan Wheatley

One Response to “Bank of England governor: Brexit could trigger recession”

  • The BoE Governor has to walk a tightrope that enables him to continue in office whatever the result. Please can we make up our mind whether BREXIT will induce Recession and, if so, whether we may have to reduce interest rates to encourage further growth. On Andrew Marr, M Carney defined recession as 2 quarters of negative growth whereas I thought it was 3 quarters. I think, in fact, it is the number of quarters that allow you to continue with negative growth until you think it will revert to growth so you don’t have to use the word Recession.

    Some claim per contra that BREXIT will increase the interest rate demanded to bankroll our debt so mortgage costs will rise. It could lead to a fall in the pound that would import inflation to counter which we may need to raise interest rates.

    Whilst the BoE has enough facts to corner the market, it is disingenuous to come out and warn of the risks based on facts and then not say which way the balance points to avoid involvement in “politics”. Some BREXITeers think that backing Britain’s exit from the EU is not an involvement in “politics”.