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The BoE is neutral on Brexit, the economy is not

Mark Carney was testifying to the House of Commons on Tuesday as to the possible impact of Brexit on the British economy, should the UK vote to leave the EU in June 23rd, 2016. The testimony to the Treasury Select Committee was watched carefully and produced three newsworthy items.

First, the need for the Governor to defend himself vis-à-vis a vehemently Eurosceptic group of Conservative Members of Parliament, whom Mr Cameron would like to think of as a minority, and who see a biased any opinion that does not verify their own conviction.

Secondly, the Governor spelt out short, medium, and long-term consequences of Brexit. His critics would have him say there would be none. Of course, even the English predecessor of Mr Carney, Lord Mervyn King, although highly critical of the Euro project could not do that. Leaving the EU will have economic consequences, from which Britain could recover or not; but, it cannot be treated as an inconsequential event for the sake of neutrality.

Thirdly, Mr Carney was asked of the policy implications Brexit would have. To which he replied what Governors of all Central Banks all over the world reply: “We’ll see, it all depends.”

An impossible defence

Many people would consider Mr Carney’s job the climax of a lifetime of achievements. No one would be wanting to switch places with him on Tuesday evening. There was nothing he could say for himself to defend his neutrality.

Predictably, Mr Carney had to find something good in the Prime Minister’s negotiation in Brussels. Failing to do so would mean – God forbid – that it was inconsequential to the debate. And So he did. “The settlement,” Carney suggested, “recognises the needs of the UK to supervise its financial stability, while not impeding the implementation of necessary, further integration amongst members of the euro area.”  To sum up, the status quo was preserved until it is not. But, what else could the Governor argue?

Predictably, Carney was accused by the Conservative MP, Jacob Rees-Mogg, that he was politically partisan, arguing that it was “beneath the dignity” of the Bank of England to jeopardize its reputation for political impartiality. Another Conservative MP, Steve Baker, explicitly accused Downing Street of pressing the Governor to come to specific pro-EU conclusions. Carney is probably the few Governor of a Central Bank in the western world that is made to publically defend his neutrality, which one may consider refreshing or degrading. If you are not emotionally attached to the debate, it is simply inconsequential. The attack on Carney was unfair, but there was nothing personal about it. It was a show.

But, in any event, that was not an easy position to be for the first Canadian Governor of the Bank of England. Carney insisted that the Bank is neutral and that he speaks with Chancellor Osborne and Prime Minister Cameron on specific policy issues alone defined by his mandate to tame inflation and ensure financial stability. In defending himself and the BoE Mr. Carney was every bit the professional Tory MPs doubt it him to be.

Spelling our dangers

Carney made clear that Brexit is a danger to financial stability. And then he went on to spell out short, medium, and long-term effects of such a decision.

Immediately, growth would suffer as investment would be weaker and consumption lower, if anything because of uncertainty.

In the medium term, a number of foreign-owned banks would be likely to relocate to Ireland or continental Europe, significantly hurting the British service economy. Banks were already making contingency relocation plans, he said. In the long run, much depended on the deal Britain would get after an exit, but the City would feel an impact.

This was very much an exercise in stating the obvious. Mr Carney may be accused of estimating that the EU made the British economy more open and dynamic. But, he did mitigate this “overstatement” by making clear that openness is not an “unalloyed good,” since it does also increase volatility.

politics versus policy

This was framed as a political event, in which MPs got to show off their Euro-skepticism. Mr Carney’s speciality of course – and mandate – has to do with policy. If the MPs would really like to know about the Governor’s thoughts, they should have read a letter accompanying the report rather than merely slice out a single quote.

Policy did have a brief if inconsequential moment during the course of the evening. The Governor was asked about the pound’s devaluation and whether that would trigger inflation and, possibly, a rise in interest rates.

The short answer was “will see.” The longer answer was that the risk of imported inflation because of devaluation. But, Brexit would also trigger weaker demand and investment, which makes raising interest rates a less than sound policy. That bit was probably the most substantial part of the conversation.