He said monetary easing will ‘likely’ be required over the summer as the economic outlook has deteriorated.
The Monetary Policy Committee (MPC) will make an initial assessment on 14 July of the measures considered necessary, with a full assessment and forecast to follow in the August Inflation Report. At that time they will discuss the range of instruments at the Bank’s disposal.
The material slowing in growth that the MPC had identified as a risk associated with the referendum now looks likely to be its central forecast.
But Carney issued a warning around the temptation to keep cutting rates.
“As we have seen elsewhere, if interest rates are too low (or negative), the hit to bank profitability could perversely reduce credit availability or even increase its overall price,” he said.
He said that while the Bank has a plan to achieve its objective of maintaining financial stability, part of that plan must be ‘ruthless truth telling’ which would involve being honest about the limits of the Bank of England’s powers.
“In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock,” he said.
“The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers. These will be driven by much bigger decisions; by bigger plans that are being formulated by others. However, we will relentlessly pursue monetary and financial stability. And by doing so we will facilitate the adjustments needed to realise this economy’s full potential.”
Overall the governor’s speech was intended to inject calm into the markets with reassurances that the Bank had planned for the eventuality that the UK would leave the EU.
He said the Bank had taken all the necessary steps to prepare for these events and would not hesitate to take any additional measures required to meet its responsibilities as the United Kingdom moved forward.
A plan for the UK’s current challenges would include a comprehensive strategy for engaging with the EU and the rest of the world. This encompassed clarifying the UK’s future trading arrangements, calibrating its openness to migration, ensuring the continuity of capital flows, and confirming the appropriate regulatory framework for the UK financial system.
