Bank of England governor Mark Carney says that the central bank will likely have to engage in a further programme of quantitative easing over the summer, as a response to the UK’s vote to leave the European Union last week.
But, more importantly, he warned that there are “limits” to what the BOE can do to address the economic problems that will be caused by Brexit.
Speaking in London on Thursday afternoon, Carney addressed the uncertainty surrounding the markets and the British economy following the vote, and said that more easing is the most likely outcome. The governor also said that the UK’s Brexit vote has “deteriorated” the outlook for the country’s economy in the coming years.
“As a result of increased uncertainty and tighter financial conditions, UK households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. Through financial market and confidence channels, there are also risks of adverse spillovers to the global economy,” Carney said.
“At the same time, supply growth is likely to be lower over the next three years, reflecting slower capital accumulation and the need to reallocate resources across sectors of the economy. Both of these forces may be exacerbated by higher uncertainty and tighter financial conditions.
“Finally, as expected, sterling has depreciated sharply. For given foreign demand, this will mean support to net trade, though this may well be dampened by uncertainty around future trading relationships. A lower exchange rate will also entail higher prices for imported consumer goods, energy and capital goods, and consequently lower real incomes.”
This assessment, Carney said, means that he believes further monetary easing will be the most likely outcome.
“In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” he added.
While the BOE will do everything it can to ensure the stability and prosperity of the British economy, there are limits to what it can do. Here is the key extract from Carney’s speech (emphasis ours):
In short, the Bank of England has a plan to achieve our objectives, and by doing so support growth, jobs and wages during a time of considerable uncertainty.
Part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do. In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock.
The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers.
While he said further easing is likely, Carney did not go as far as saying it will definitely happen, saying that an initial decision on monetary policy easing will be made at the central bank’s next Monetary Policy Committee meeting on July 14. It will then make a full assessment of conditions at the release of the August Inflation Report.
You can read the full text of Carney’s speech on the Bank of England’s website here.
The pound fell substantially during Carney’s speech, crashing by as much as 1.2% as the governor made his comments. Here is how that looked: