Bank of England governor Mark Carney has told economists that rate-setters will be forced to make harsh cuts to support the economy if Brexit is not smooth.
Speaking in London last night, Carney says the bank is ready to act in the face of a messy exit from the European Union, warning that the contingency plans in place will see monetary policy “on a different path” in an attempt to stop likely job loss and market instability.
This path is likely to echo the economic measures put in place following the EU referendum in 2016.
Carney said: “Divine coincidence has continued to reign in the euro area and the US but that, unfortunately, has not been the case in the UK economy, which has been subject to a series of major supply shocks over the past five years.”
He added: “[This] is creating tensions between short-term output and inflation stabilisation and Brexit is the latest and potentially largest example.”
Carney confirmed the economy’s underperformance of the monetary policy committee’s projections ahead of the referendum means Britain will need to be ready for two options.
He said: “The first path is consistent with the MPC’s current central projection which assumes a smooth transition to a Brexit that is the average of a range of outcomes. In this case, the committee’s reaction function will become conventional again, with the path of policy driven primarily by demand.”
A sharper Brexit or disorderly transition would see the MPC faced with balancing returns inflation to target and growing jobs and activity, similar to how it did in the wake of the EU referendum.
He said: “Observers know from our track record that, in exceptional circumstances, we are willing to tolerate some deviation of inflation from target for a limited period of time.”
Carney’s speech comes a few days on from saying UK households are around £900 worse-off as a result of the EU referendum.