Mr Carney insists the BoE has a duty to speak out on Brexit but his latest intervention will infuriate Vote Leave campaigners who have already accused him of acting “beneath the dignity of the Bank of England”.
In a letter written at the end of March to Andrew Tyrie, chairman of the Treasury select committee of MPs, Mr Carney set out the BoE’s view on the effects of a 10 per cent drop in sterling.
The pound’s value fell more than this amount against the UK’s main trading partners between December 2015 and earlier this month, before staging a recovery in response to markets becoming more sure Britain will vote to remain in the EU.
The BoE’s analysis is that if a 10 per cent fall in sterling came for no underlying reason, it would push prices up 2.75 per cent over four years, raising the annual inflation rate by about 0.75 per cent a year. It would also boost growth by lowering the international price of UK exports and encouraging companies and households to buy British rather than spend more on higher-priced imports.
Mr Carney added that these rules of thumb would not apply in the event of Brexit because “if increased uncertainty were a key underlying cause of this depreciation, aggregate demand might be affected”.
“Greater uncertainty could lead firms to postpone some investment projects and households to defer some spending”.
While economic weakness and lost jobs would remove some of the heat from the inflationary impact of a lower pound, the ultimate effect would depend on the balance of sterling’s direct effect on prices, demand and supply.
“There are plausible scenarios where the combined effects of the exchange rate move and its [effects] on aggregate demand, aggregate supply and exchange rate pass-through lead to a lower path for growth and a higher path for inflation,” Mr Carney said without mentioning any scenarios that gave more favourable results. [...]
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