In testimony to lawmakers on Wednesday, Governor Mark Carney said the response from the bank's nine-member rate-setting panel to a no-deal Brexit will depend on the impacts on demand, supply and on the exchange rate. A fall in the pound, for example, could lead to a rise in inflation that could prompt some rate-setters to want higher rates.
Carney said "some of us, myself included" think it's "more likely" that some stimulus will be provided but that are "no guarantees."
He said the risks of a no-deal Brexit have increased in recent weeks and that's weighing on the economy, particularly on business investment and the housing market.
Under a no-deal scenario, tariffs and other restrictions would be imposed on trade between Britain and the EU. Most economists think that will lead to a deep recession in Britain that would likely prompt the central bank to slash interest rates and launch another monetary stimulus program.
However, if Britain secures a Brexit deal, "there would be a requirement for limited and gradual rate increases" to the main interest rate, which stands at 0.75%, Carney said.
The discussion over a no-deal Brexit is at the forefront of the battle for the leadership of the Conservative Party between Boris Johnson and Jeremy Hunt. The winner will become prime minister next month.
Johnson, a former mayor of London, has said Britain will leave on Oct. 31 "do or die" while Hunt, the current foreign secretary, says it's an artificial deadline that could be extended again.
Brexit has already been delayed from its original date of March 29 after Parliament rejected Prime Minister Theresa May's Brexit deal three times. Both leadership candidates have said they will look to negotiate changes to the withdrawal agreement that deals with citizens' rights post-Brexit, Britain's financial obligations to the EU and making sure no hard border returns between EU member Ireland and Northern Ireland, which is part of the United Kingdom.
Johnson has said that a "standstill" agreement can be reached which would see a temporary continuation of the tariff-free economic relationship between Britain and the EU.
Carney and many others have said such an agreement is only possible if Britain and the EU are working toward a new trade deal. But there's no guarantee the EU would agree to that if issues within the withdrawal agreement, such as the Irish border, have not been dealt with. The other countries in the World Trade Organization would also have to give their backing.
Carney meanwhile warned that opting for a no-deal Brexit just to end the current economic uncertainty will be damaging.
"The loss of trading relationships with absence of transition is the worst way to resolve that uncertainty," he said.
"There's a reason why in the 40-plus trade deals that have been stuck in the last quarter century between advanced economies that they've always had some form of transition from the status quo to the new arrangements. I would underscore that whatever arrangement we're coming to that it is highly desirable to give businesses enough time to adjust to that new reality."
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