Mark Carney, the governor of the Bank of England, testified before the British House of Commons' Treasury Committee on March 8 on the potential impacts of Britain's leaving the EU, a scenario commonly referred to as "Brexit." Carney began by stating that he would not take a position on the issue, which will be put to a referendum in June. Several members of parliament called his neutrality into question, however, with Conservative MP Jacob Rees-Mogg telling Carney, "in your evidence, in your letter and in your speech you are getting into political partisanship, removing yourself from your Olympian detachment."
"The Biggest Domestic Risk"
A few of Carney's statements were understandably not to the "Leave" side's liking. He called Brexit "the biggest domestic risk to financial stability." He added, though, that "global risks, including from China, are bigger than the domestic risk."
He added that leaving the EU could raise inflation, since the pound would probably fall in value and raise the price of exports. On the other hand, if the lower exchange rate resulted from uncertainty, "it could be affected by a reduction in consumption at the same time that could have a downward affect on inflation and we would have to balance the two." He said that London mayor Boris Johnson's announcement last month that he would campaign to leave the EU probably did contribute to the pound's fall to seven-year lows.
Carney suggested it was possible that Brexit would cause the loss of banking jobs in London, saying, "I would say a number of institutions are contingency planning for that possibility – major institutions, foreign headquartered, which have their European headquarters here."
He also said that EU membership contributes to the British economy's "dynamism."
Caveats on Caveats
Carney did not only point to the risks of leaving the EU. He said that the "unfinished business" of monetary union posed a risk for Britain if it remained. He indicated that while leaving would probably add to the regulatory burden on bigger businesses, it might reduce the burden on smaller ones.
On the whole, though, his comments came across as broadly sympathetic to remaining in the EU, which infuriated pro-Brexit MPs such as Rees-Mogg. His neutrality on the issue was frequently challenged, leading him to insist that the Prime Minister, who is campaigning to remain, had not "leaned" on him to express pro-EU views He seemed to want to avoid being dragged into the political mud-slinging, insisting that the BOE would not produce any more reports on the effects of leaving the EU.
Louder than Words
The most telling message out of Britain's central bank regarding Brexit may be the previous day's announcement that it would offer three additional liquidity auctions in June, on top of its regular monthly auction. The extra cash is intended to combat short-term uncertainty arising from the referendum, which is scheduled for June 23. In Tuesday's testimony, he referenced the potential short-term impacts of Brexit: "There could be lower levels of activity because of the degree of uncertainty that could affect investment and household spending. Reasonable expectations during a period of uncertainty."
The Bottom Line
The campaigning around Brexit is heating up, and despite his attempts to appear neutral – the sincerity of which is up for debate – Carney's broadly pro-remain testimony before Parliament will add fuel to both sides' arguments. Investors concerned about the impacts of Brexit should note that the central bank is preparing to inject more liquidity in the run-up to the vote, and remember the impact Boris Johnson's pro-Brexit announcement had on the pound, driving it to multi-year lows.