Mark Carney says the Bank of England “has identified the clouds on the horizon.” (AP Photo/PA, Owen Humphreys)
Investors sold off pound sterling once again Thursday following a pessimistic speech from Mark Carney, the governor of the Bank of England, on the consequences of the United Kingdom’s decision to leave the European Union.
“The economic outlook has deteriorated,” Carney said. “The bank has identified the clouds on the horizon and can see that the wind has now changed direction.”
Carney assured investors that the British financial system was stable, that the central bank was prepared for the divorce and had a plan to handle the uncertainty it would create.
Yet, he added, “Part of that plan is ruthless truth telling, and one uncomfortable truth is that there are limits to what the Bank of England can do.”
As Carney spoke, the price of the British pound abruptly declined another 1.4 percent in terms of dollars. Since the referendum last week, the pound has now declined 9.4 percent.
Investors were likely responding to Carney’s statement that over the summer, the bank would probably have to ease monetary policy, making more pounds available to the financial system and to the market as a whole. Doing so could help prevent a recession in the United Kingdom, but more accommodation from the central bank would also keep the pound cheap.
Such compromises would be unavoidable for the Bank of England in the future, Carney warned. The referendum he said, could not only cause inflation by cheapening the pound, but could also reduce economic activity in the United Kingdom as global investors shift their capital to the continent if British firms lose access to that large market.
The central bank would be able to stimulate the economy by easing monetary policy or combat inflation by restricting the …read more