Bank of England paints a grim post-Brexit scenario

UPDATE: Carney says transiitonal deal is best for UK, regardless of Brexit outcome

The Bank of England warns of a harsh economic shock if the UK leaves the EU in a disorderly manner. Reuters

Bank of England governor Mark Carney said on Thursday it was in Britain's best interests to strike a transition deal with the European Union, regardless of whatever form Brexit takes.

"It is in the interests of the country to have some time to transition to whatever relationship there is," Carney said in a BBC radio interview, a day after the central bank published a range of Brexit scenarios it said banks could have to deal with.

Britain risks suffering an even bigger hit to its economy than during the global financial crisis 10 years ago if it leaves the European Union in a worst-case Brexit scenario in four months' time, the Bank of England (BoE) said on Wednesday.

Hours after the government issued its own stark warning about a no-deal Brexit, the BoE said the economy could shrink by as much as 8 per cent in about a year.

The BoE said the "disorderly" scenario - involving severe delays at UK borders and financial markets' loss of confidence in British institutions - was not its base case.

But if it happened, there would be a 25 per cent tumble in the value of sterling - taking it close to parity against the dollar - a spike in inflation to 6.5 per cent from around 2.4 per cent now, and a jump in interest rates, according to Reuters. House prices would fall by 30 per cent.

A disorderly Brexit could cause also UK commercial-property prices to fall by even more than after the global financial crisis, the BoE warned.

Price of offices, warehouses, malls and hotels could drop as much as 48 per cent if the UK crashes out of Europe without a deal, more than the 42 per cent peak-to-trough decline following the 2008 global crisis, the bank said in its Financial Stability Report, according to Bloomberg. In a “disruptive” Brexit, the slide would be limited to 27 per cent, the central bank said.

Prices for the best UK commercial real estate have so far mostly shrugged off the 2016 vote to leave the European Union after the weaker pound made Britain cheaper than markets such as France and Germany. The prospect of a drop in prices, coupled with the effects of a further slide in the currency if the UK does crash out of the bloc without a deal, could make the nation’s £833 billion (Dh4.03tn) commercial-property market an even better bargain.

Mr Carney has never shied away from doomsday Brexit warnings, but in his latest analysis he’s gone further than ever.

While the bank and the government both assume the economy could be as much as 11 per cent smaller than if the UK remains in the European Union, the pace of the decline is far more rapid in the central bank’s scenario.

The dire assessments come before Theresa May’s Brexit deal faces a key vote in Parliament next month. With the agreement facing criticism from all sides, there are doubts over her ability to get it passed, and she’ll be hoping the stark analysis of a disorderly scenario may be enough to change some people’s minds.

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For the Treasury, the gap between economic output under the baseline and no-deal Brexit reaches a maximum of 10.7 per cent after 15 years. For the BoE, it gets to 10.5 per cent within five years, three times as fast.

"Our job is not to hope for the best but to prepare for the worst," Mr Carney said, noting that Britain's banks could cope with the worst Brexit shock.

A deal that kept Britain and the EU in a close future relationship could lead to faster economic growth than the BoE pencilled in earlier this month, the central bank said.

But all of the BoE's scenarios assumed interest rates will rise. In the worst-case Brexit, rates could rise to 5.5 per cent - a level last seen in 2007, before the financial crisis - from the current base rate of 0.75 per cent.

Andrew Sentance, a former BoE interest rate setter, challenged the BoE over its worst-case scenario.

"Does anyone really believe any of this as a real-world scenario?" he said. "The Bank of England is undermining its credibility and independence by giving such prominence to these extreme scenarios and forecasts."

Mr Carney denied the charge of scaremongering.

"Parliament has demanded this analysis," he said. "It's not supposed to make people scared, it's supposed to provide reassurance that, even if this happened, which is not likely, the system is more than ready for it."