MercoPress. South Atlantic News Agency

Bank of England warnings on a no-deal Brexit: recession and plunging pound

The Bank's scenario is not what it expects to happen, but represents a worst-case scenario, based on a so called “disorderly Brexit”

A no-deal Brexit could send the pound plunging and trigger a worse recession than the financial crisis, the Bank of England has warned. It said the UK economy could shrink by 8% in the immediate aftermath if there was no transition period, while house prices could fall by almost a third. The Bank of England also warned the pound could fall by a quarter.

The Bank's analysis comes after the Treasury said the UK would be worse off under any form of Brexit.

This Bank's scenario is not what it expects to happen, but represents a worst-case scenario, based on a so called “disorderly Brexit”.

The scenario looks at the five-year period after the UK leaves the EU. But by the end of 2023, the economy is expected to resume growing“

”These are scenarios not forecasts. They illustrate what could happen not necessarily what is most likely to happen.

“Taken together the scenarios highlight that the impact of Brexit will depend on the direction, magnitude and speed of the effect of reduced openness of the UK economy,” Bank of England governor Mark Carney said.

The Bank of England has made a number of assumptions - not forecasts - about what would cause a disorderly Brexit: The UK reverts to World Trade Organization rules; No new trade deals are implemented by 2022; The UK loses all access to existing trade agreements between the EU and third countries; Severe disruption at borders because of customs checks; Migration reverses from 150,000 a year to falling by 100,000 a year.

The Bank of England does not give a probability of this happening.

Scenarios drawn up by the Bank of England show that GDP would fall by 8% in 2019 against its current forecast.

Growth would quickly resume and the economy would expand again by the end of 2023 but be smaller than where it was before.

Unemployment would rise to 7.5%, house prices fall by 30% and commercial property prices collapse by 48%. Interest rates would reach 4%.

The Bank looked at three other scenarios: a “disruptive” Brexit - one where the UK retained access to some trade agreements; what might happen if trading arrangements were agreed to give the UK a “close” relationship; what might happen if trading arrangements were agreed to give the UK a “less close” relationship; A close relationship is one with no customs checks, no regulatory barriers and a partial deal agreed on financial services.

A less close relationship is one where customs checks start after 2021 and other regulatory checks are put in place.

Mr Carney said the Bank was monitoring markets and indicated that it was ready to lend to UK banks if necessary. He also indicated that banks might be allowed to hold less capital if risks became too great. But he warned there was little the Bank could do.

“There is little monetary policy can do to offset the potentially significant hits to productivity and supply that Brexit could entail... the future potential of this economy and its implications of jobs, real wages and wealth are not in the gift of central bankers,” he said.