'Disorderly' Brexit could spark rate cut and cash injection, Carney suggests

A "disorderly" Brexit transition period may force the Bank of England to cut interest rates or pump money into the economy to stabilise it, governor Mark Carney has suggested.

The UK central bank's current projections are based on a smooth transition when Britain leaves the European Union, he said in a speech on Thursday, before warning that "a sharper Brexit could put monetary policy on a different path".

Addressing the Society of Professional Economists he said that if that happened the bank's Monetary Policy Committee (MPC) would face "a trade-off between the speed with which it returns inflation to target and the support policy provides to jobs and activity".

He added: "On this path, the MPC can be expected to set policy to manage any trade-off using the framework it applied following the referendum."

Following the 2016 referendum the Bank cut interest rates to a historic low of 0.25% and added £60 billion to its quantitative easing programme.

Earlier this week Mr Carney said that Brexit has knocked real household incomes by around £900, and lowered growth by "up to 2%" against what the Bank had expected in 2016 if the UK had voted to remain in the EU.

His Thursday speech came after MPs warned that the UK may be forced to remain in the EU's customs union beyond 2020 because of the Government's failure to set out alternative plans, MPs have said.

The cross-party Commons Exiting the European Union Committee issued a withering report on Prime Minister Theresa May's efforts to find a replacement customs system and concluded that extending the current arrangement was the only "viable option" left.

The MPs said it was "highly unsatisfactory" that ministers had yet to agree on the trading and customs arrangements they wanted to achieve after Brexit.

Existing rules are set to be extended during the transition period from the date of Brexit in March 2019 until the end of 2020.

But the Brexit Select Committee said the lack of progress on alternatives, and the need to avoid a hard border between Northern Ireland and the Republic of Ireland, meant ministers may have to accept an extension for the customs union beyond that date.

On Wednesday it emerged that businesses could be left up to £20 billion worse off if the customs plan favoured by Brexiteers is implemented.

The so-called "max fac" plan to use modern technology to solve the Irish border question would leave firms facing huge charges for customs declarations and for EU "rules of origin", according to HM Revenue and Customs chief Jon Thompson.

In contrast, the second option - the new customs partnership (NCP) believed to be favoured by the Prime Minister - would cost a maximum of £3.4 billion and may end up having "a net cost of zero or less".

But neither model is expected to be ready when the proposed transition period expires at the end of 2020.

The Exiting the EU Committee's report noted that, while Brexit Secretary David Davis had ruled out remaining in the customs union, "in the absence of any other plan, such an extension will be the only viable option".

The cross-party group was split over a key paragraph of the report containing some of the most trenchant criticism of the Government, with three Tory members of the committee failing in a bid to water down the language used.

The report noted that the Government had not yet agreed which customs model it prefers "despite this being absolutely integral to the future EU-UK relationship and the UK's trade relationship with the rest of the world".

"There is disagreement in Cabinet over which option to pursue, while it has been reported that the European Union has rejected both proposals on the grounds that they are seen as unworkable," the report noted.

It added that the Government "appeared to accept that each model is deficient, as it has conceded that more work on both is required".

The MPs also called for ministers to set out the Government's version of the "backstop" proposal to address the Irish border issue - which will come into effect if no alternative is found - as "a matter of urgency".

Committee chairman Hilary Benn said: "We are rapidly running out of time to get new trade and customs arrangements in place.

"Given that ministers are indicating that neither of the two options being discussed are likely to be ready by December 2020, when the transition period ends, the UK will in all likelihood have to remain in a customs union with the EU until alternative arrangements can be put in place."

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