Mark Carney has warned that threats to the Bank of England’s independence could see sterling slump even further and cause investors to flee UK assets.
The Threadneedle Street governor told Lords on the economic affairs committee this afternoon that central bank independence had “stood the test of time” and could not be “called into question” without serious repercussions across the financial markets.
The governor also said a number of the UK’s biggest banks would be ready to shift operations and staff out of the UK within the next year if they deem it appropriate given the direction of the UK’s Brexit negotiations.
“If [the operational independence of the Bank] were to be called into question, one would expect to see the emergence of a risk premium around a range of UK assets,” Carney said. “It would be most prominent around the currency, gilt markets and inflation expectations.”
Risk premiums means investors demand a higher rate of return, and pay lower prices, because they believe the assets are less stable.
The no-nonsense response from Carney comes after Theresa May appeared to question his tactics in her set piece speech to the Conservative Party Conference and as a number of people have criticised his actions in the run-up to and aftermath of the referendum.
"Markets have taken note of some of the comments," Carney warned.
On the prospect of financial services firms moving operations across the Channel, Carney said: “We are aware of the contingency plans that are in varying stages of readiness at these institutions, who would be in a position to adjust some activities over the course of the next year, if they saw fit.”
Nevertheless, Carney said it should be easy and “in everyone’s interests” to strike an agreement over regulatory recognition of banks’ rights to operate across Europe from the UK under equivalence rules. He acknowledged, however, this was just “one part of a much bigger discussion and much bigger trade-offs.”
Carney was speaking on an already-nervy day for currency markets which had to contend with interventions from both Carney and Mario Draghi, president of the European Central Bank (ECB) and a ream of data out of the United States. Ahead of his grilling by peers the pound tumbled one per cent against sterling and the dollar and the euro, before recovering slightly to stand 0.7 per cent down at €1.1163 and $1.2151.
With a de facto end-of-year deadline looming, Carney refused to give anything away about whether he intends to take up his option to stay at the Bank for another three years beyond his self-declared 2018 departure date. He told peers it would be an “entirely personal decision” and instructed “nobody to read anything into that”.