LONDON (Reuters) - Bank of England policymakers will be “prudent not passive” after Britain leaves the European Union, keeping a close eye on exchange rate moves and other factors affecting inflation, Governor Mark Carney said on Wednesday.
Britain is due to quit the EU on March 29, though Prime Minister Theresa May is struggling to find parliamentary support for the transition deal she agreed with the bloc in November, without which there is a risk of chaos at Britain’s borders.
As parliament resumed debating May’s plans on Wednesday after a holiday pause, Carney warned the pound risked a further decline if markets judged economic ties between Britain and the EU were being weakened.
“The nature of that partnership is currently the subject of feverish debate in parliament and the prospects for sterling will depend heavily on how Brexit actually progresses,” he said in his first public comments of 2019.
The BoE and Britain’s banks are ready for whatever form Brexit takes, Carney said in an online discussion that focussed on the future of cash and the BoE’s views on crypto-currencies.
“From a monetary policy perspective, the Monetary Policy Committee is well-prepared for whichever path the economy takes. We have the tools we need. We will be prudent not passive,” he said.
Brexit jitters were visible in a rise in British banks’ funding costs and a fall in the share prices of companies that were focussed on domestic markets in Britain, he said, though broader volatility also reflected global trade concerns.
The BoE has previously said interest rates could move in either direction if Britain suffers a disruptive departure from the EU this year, though many economists doubt whether the central bank would raise rates in the face of the shock of a chaotic Brexit, even if sterling tumbles.
Financial markets see only around a 50 percent chance that the BoE will raise interest rates this year, and economists say the outlook depends heavily on Brexit.
On Wednesday, Carney noted that falls in sterling tended to have a material and lasting upward effect on inflation in Britain. However, sterling moves are not the only factor that would drive interest rate decisions, he added.
Separately, Carney said China’s yuan could potentially become a future global reserve currency alongside the U.S. dollar, though this was likely to lag behind the increase in the size of China’s economy relative to that of the United States.
“The U.S. economy overtook Britain’s in the second half of the 19th century, but it took until the 1920s before it became a dominant currency in international trade,” he said.
Carney made similar comments in 2011 when he headed the Bank of Canada.
Reporting by David Milliken; Editing by William Schomberg/Mark Heinrich