Critics accuse Bank of England of using its forecasts to play with politics
The Bank of England sparked a row today after publishing analysis of its ‘worst case Brexit scenario’ just 13 days ahead of a crucial Parliamentary vote on Theresa May’s deal.
The controversy was sparked when governor Mark Carney unveiled the Bank’s latest ‘stress test’ assessment of the UK’s ability to withstand dramatic economic shocks, including “a disorderly Brexit”.
Under such a scenario, there would be no transition deal, the imposition of tariffs, chaos at the border and a dramatic spike in interest rates. The scenario also assumed that neither the UK or EU would take any mitigating action.
In the UK’s case, this could include changing tax policy – something chancellor Philip Hammond has previously said would be on the cards in the event of a no-deal exit.
The Bank suggested there would be a hit to GDP of eight per cent, spiking unemployment and a house price crash of 30 per cent.
The analysis indicated the deal May had struck with the EU would be the least-damaging Brexit outcome for the UK economy.
The Bank’s report came hot on the heels of a Treasury analysis released earlier today, which claimed the UK would be poorer outside the EU in every measured scenario – but also said May’s plan would cause the smallest hit to growth.
With up to 100 Conservative MPs threatening to vote against the Prime Minister’s proposal, there were suggestions the Bank’s intervention was designed to spook the Commons into avoiding a no-deal outcome.
Brexit-backing MPs lashed out at the Bank, with Treasury Select Committee member Charlie Elphicke saying: “The other day Dr Carney told the Treasury Select Committee that interest rates could go down in a no-deal Brexit. Today he says they will rise. The Bank of England is all over the place.”
Former Monetary Policy Committee member and Remain supporter Andrew Sentance also weighed in, tweeting: “The Bank of England Brexit analysis is highly speculative and extreme.
“It will add to the view that the Bank is getting unnecessarily involved in politics and that will further undermine perceptions of its independence and credibility.”
Nobel-prize winning economist Paul Krugman said the Bank’s scenario was “pretty far out on a limb”, saying that the assumptions “do not follow from basic trade theory.”
However, Simon French, chief economist at Panmure Gordon and a former civil servant, came to Carney’s defence, saying the Bank was carrying out its mandate.
He said: "More fool us if we take these numbers and run with them slavishly within a different set of circumstances.
"I don't think they are in cahoots with the government on this one."
Carney denied the Bank of England was feeding into ‘Project Fear’ in a bid to drum up support for May’s deal and said the Bank was asked by MPs to assess the scenarios. He added that the Bank had a responsibility to financial stability and to the people of the UK.
The governor told reporters at a press conference: “The ‘no deal’ scenario is to provide reassurance, it’s not supposed to make people scared.
“It’s to provide reassurance that even if this happens, which is unlikely, the system is more than ready.”
“The UK financial system is ready for Brexit whatever form it takes.”
Further support for May’s plan came from Airbus, who told MPs this morning aerospace firms may give the green light to investment in the UK currently on hold if the PM’s deal passes through parliament.
That call was echoed by Britain’s richest man, Jim Ratcliffe, in a statement through his chemicals company Ineos.
“We would hope that our parliamentarians would now put the good of the country ahead of political considerations and ensure a safe passage for the deal through parliament,” said the statement.