Carney warns Brexit no deal odds are "uncomfortably high"

Randal Sanchez
August 3, 2018

LONDON - The pound fell below $1.30 against the dollar on Friday morning after Bank of England Governor Mark Carney said there was an "uncomfortably high" chance that Britain will leave the European Union without a deal.

The pound slipped to below $1.30, its lowest point in eleven days, as Mr Carney issued the warning on negotiations with Brussels.

"We ran the system through a stress test which had real estate prices going down by more than a third, house prices and commercial real estate, interest rates going up by nearly four percentage points, unemployment going to nine percent and the economy going into a four percent recession".

"I think the possibility of a no deal is uncomfortably high at this point", Carney said in an interview with BBC radio.

But the message for interest rates remained one of gradual and limited increases as the central bank saw inflation only a fraction above its 2 percent target over the next few years.

The pound dropped significantly against both the dollar and the euro in response.

Referring to last year's stress tests on the banking system, Carney said: "We've put the banks through the wringer to make sure that they have the capital".

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After Thursday's interest rate rise, interest rates stand at 0.75%, unemployment is forecast to fall below 4% and the United Kingdom economy expected to grow faster than the 0.2% in the first quarter of the year.

"We have made sure that banks have the capital, the liquidity that they need and we have the contingency plans in place. if there were to be a no deal Brexit". "We don't want to have people worrying that they can't get their money out", he told the BBC's Today programme.

"We have prepared the financial institutions for very hard circumstances".

"The MPC continues to judge that the United Kingdom economy now has a very limited degree of slack", the committee said in minutes published with its decision.

It also fleshed out its thinking on how far it is likely to go with its planned rate hikes by publishing a new long-term forecast for what it called Britain's trend real interest rate, or "R*", of zero to 1 percent, more than 2 percentage points below its pre-financial crisis level. The Institute of Directors said the bank had "jumped the gun" and the debt charity StepChange is concerned about the impact on families already struggling with their debts.

He said financial market expectations for rates hitting 1.5% over the next three years were "not a bad rule of thumb, given the current state of the economy". That compares with the long-term average of 5%.

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