The Bank of England looks set to upgrade its forecasts for the UK economy after admitting that some of the risks posed by the Brexit vote last June have now receded.
Giving evidence to the Treasury select committee, governor Mark Carney said the Bank’s actions to avoid a market meltdown after the referendum were a key reason why Threadneedle Street might be raising its forecasts for a second time.
Carney also said the government needed to agree a transition deal for quitting the EU and insisted that Brexit posed a greater risk to the remaining members of the EU than the UK.
The Bank will publish its latest report on the economy next month and will take on board the stronger than expected performance in the second half of 2016.
“I would say, and I’ll say this very lightly, which is that recent data would be consistent with some further upgrade of the forecast but that process has not yet started,” said Carney.
In November, the Bank raised its growth forecast from 2% to 2.2% for 2016 and from 0.8% to 1.4% for 2017. Carney said the Bank had helped to “make the weather” through its emergency actions to boost growth taken in six weeks after the referendum.
His testimony coincided with another strong performance by the UK’s leading stock-market quoted companies, with the FTSE 100 closing at a record high for a tenth successive day. Share prices for companies which are dependent on their US dollar earnings have been boosted by the continued weakness of the pound, which on Wednesday hit a near 32-year-low against the American currency of just over $1.20.
Carney was quizzed by MPs about the forecasting record of the Bank following remarks last week by Threadneedle Street’s chief economist, Andy Haldane, in which he described the collapse of Lehman Brothers as the economics profession’s “Michael Fish moment” – the UK weather forecaster who in 1987 failed to predict a gigantic storm coming.
The governor said the Bank’s overly-pessimistic forecast for the economy in the immediate wake of the Brexit vote was less serious than its failure to spot the financial crisis of 2007-08.
“This is about the near-term strength of the economy which is absolutely welcome,” the governor said. “Missing the financial crisis is a big deal … a different order of magnitude.”
Carney defended the Bank, saying it had helped the UK through the potentially difficult post-referendum period in two ways: by cutting interest rates and by ensuring the banking system was “rock solid”.
While admitting that Brexit still posed financial stability risks, Carney said the other 27 members of the EU now faced a bigger threat than the UK.
“I’m not saying there are not financial stability risks to the UK … but there are greater financial stability risks on the continent in the short term, for the transition, than there are for the UK.”
Carney said other EU nations relied heavily on the City for their financial needs and could face major problems if international banks based in London are no longer able to gain easy access to European countries and corporations. “If you rely on a jurisdiction for three-quarters of your hedging activities, three-quarters of your foreign exchange activity, half your lending and half your securities transactions you should think very carefully about the transition from where you are today to where the new equilibrium will be.”
Andrew Tyrie, the Conservative MP who chairs the committee, said the governor had given advice to both the government and the EU about the need for transition arrangements. “ And he’s also told the UK’s negotiating counterparts in the EU that they, more than the UK, are vulnerable to financial stability risks during the period of transition. I hope they are all listening,” said Tyrie.
Carney agreed with the analogy made earlier this week by HSBC bank chief Douglas Flint that the risk posed by Brexit to the financial markets was like a Jenga tower in which it was difficult to know which pieces could be removed without endangering the structure.
“I think it’s a decent analogy. I think just like when you play Jenga and you start early on, there are some pretty obvious pieces you can take out without imperilling the tower,” he said.
“At some point, losing elements of that has outsized – could have outsized – effects, and these are some of the judgements that the government will have to make,” he added.