LONDON, March 8 (Reuters) - Bank of England Governor Mark Carney and Deputy Governor Jon Cunliffe spoke on Tuesday to members of Britain’s parliament about the country’s membership of the European Union, ahead of an in-out referendum on June 23.
During a session that lasted close to three hours, Carney rejected accusations of partisanship in the EU debate made by Jacob Rees-Mogg, a eurosceptic Conservative member of parliament.
Below are some of the highlights of the session.
PRO-BREXIT MEMBER OF PARLIAMENT JACOB REES-MOGG TO CARNEY
I am concerned that in the evidence you’ve given you’ve continued the tendency of the letter (sent earlier to members of parliament) and your speech to pick on the positives of the European Union and ignore the negatives.
What concerns me is that the influence and strength of the Bank of England is in its Olympian detachment from day to day political partisanship, and in your evidence, in your letter and in your speech you are getting into political partisanship, removing yourself from your Olympian detachment, (and) damaging the Bank’s ability to regulate through influence, which has historically been just as important as the black letter of the law.
CARNEY RESPONDS TO REES-MOGG
With respect Mr Rees-Mogg, what concerns me is your selective memory in terms ... my responses.
REES-MOGG TO CARNEY, IN SEPARATE EXCHANGE
The statement you make about the dynamism of the economy could just as well refer to the reforms introduced by Margaret Thatcher. It is speculative and beneath the dignity of the Bank of England to be making speculative, pro-EU comments.
CARNEY RESPONDS TO REES-MOGG
I am not going to let that stand ... Take the example of trade ... I am very confident about the grounding of the foreign direct investment point.
CARNEY: BREXIT BIGGEST DOMESTIC RISK TO FINANCIAL STABILITY
It is a risk to domestic financial stability and it has some potential to amplify pre-existing risk to financial stability.
The issue is the biggest domestic risk to financial stability in part because of the issues around uncertainty but also because it has the potential to ... amplify risks around the current account, potential risks around housing, potential risks around market functioning, which we’re trying to mitigate, and also associated risk with respect to the euro area.
I think if we look at the pound since November, since our inflation report in November, and obviously it moves around but high single-digit depreciation on ERI and relative to the U.S. dollar in terms of its dollar trade-weighted basket, there’s a few causes of this.
One of them is the change in the perceived stance of monetary policy in Europe, itself to do with the easing of the European Central Bank ... relative to expectations that the market had formed, so that partly accounts for some of the move there.
A notable depreciation in sterling, if that were to occur associated with the decision to leave, creates a challenge, not an insurmountable challenge, but a challenge for the monetary policy committee, because the committee would have to take into account not just that level adjustment and the pass-through that would come from lower exchange rate, which would be considerable and influence the stance of monetary policy ... but we would also have to take into account the reason for it and if the reason is driven, as may well be the case, because of uncertainty, what else is affected by uncertainty, is there a reduction in investment and household consumption at the same time which would have the opposite affect, a downward pressure on inflation, and we would have to balance the two in making a determination of the appropriate path of monetary policy at that stage.
Trade negotiations are generally slow moving and they could take a number of years.
The capacity for trade negotiations is pretty full at the moment so if you look at the bid agreements so I would have thought that those agreements normally take up to five years to do.
One would expect a host of asset prices would be affected.
From a financial stability perspective, what we are particularly focused on is the condition of bank funding markets. Last night’s announcement is entirely precautionary to protect against that conceptual risk.
It in part depends on how quickly the new relationship is defined. All things being equal, one would expect that on the margin there would be a reduction in foreign direct investment given that level of uncertainty, and that would be compensated by more short-term capital flows which would be attracted potentially by changes in the level of sterling and changes in the levels of interest rates.
In terms of the implications of the referendum, we have seen a marked increase in volatility in the options market around the date of the referendum, once the date became known, and the skews in the options market (...) have gone up quite sharply, above levels that were seen during the Scottish referendum.
QUESTION: If we do not have the mutual recognition we have now, what impact will that have on the amount of financial business done in London?
CARNEY: One would expect some activity to move, certainly there’s a logic to that and there are views that have been expressed publicly and privately by a number of institutions that they would look at it, and I’d say a number of institutions are contingency planning for that possibility.
I can’t give you a precise number in terms of institutions or jobs or activity because we don’t know where we’d be on that continuum between a formal mutual recognition or purer third country access.
QUESTION: In the event we didn’t get full mutual recognition there would be some loss of business for the City of London?
CARNEY: Without question.
In terms of relative locations, they include Ireland or jurisdictions on the continent and there are a balance of factors which would drive it.
There are certain measures we can take in the short term to support the functioning of the core of the financial system, but that is not to provide a blanket assurance that there would not be issues in the short term with respect to financial stability (in the event of a Brexit).
CARNEY: NOT TAKING VIEW ON LONG-TERM IMPLICATIONS OF BREXIT
We are not forming a view because it’s outside our remit. We are not forming a view on the economic implications of leaving the European Union, if that were to be the case.
There can be short term implications for activity in the United Kingdom and therefore more pressures on prices, and there are potentially countervailing forces. There could be lower levels of activity because of the degree of uncertainty that could affect investment and household spending. Reasonable expectations during a period of uncertainty.
On the converse, there could be movements on the exchange rate which would push up on inflation through normal exchange rate capacity and the Bank would have to take an assessment of those forces and their likely persistence in terms of managing monetary policy to the achieve the inflation target.
To provide a perspective on it (the impact of Brexit on wages), we would have to conduct a comprehensive review on the economic impact of leaving, which is not something we have done and is not something we intend to do, given our focus on our remits.
We will not be making, and nothing we say should be interpreted as making, any recommendation with respect to that decision. (referring to the June 23 referendum)
CUNLIFFE ON BREXIT RISKS FOR UK’S INFLUENCE ON BANK RULES
I would think that once we are outside of the European Union, and if we wanted to remain in the single market for financial services, it would be a very big negotiating ask to also have the influence on setting the rules that we have at the moment. So when you see how the EFTA counties participate, the Swiss and others in the rule setting, they’re consulted but they don’t have a say. It’s theoretically possible that a say could be negotiated, as I say we’re in unprecedented territory, but to me it’s not likely that we would be able to stay in the single market and have the influence on setting the rules that we have as a member of the European Union if we were outside the European Union.
It is in the interest of the United Kingdom that the European Monetary Union is put on much sounder institutional footing.
To be clear, we did think there were risks from remaining in the European Union and risks particularly related to the development of the Euro area.
CARNEY ON WHAT HE HAS DISCUSSED WITH PRIME MINISTER CAMERON
I have not had conversations with the Prime Minister about what I might say about the European Union.
What I will say, as you would expect, in the context of a subset of issues which the government was negotiating as part of this new settlement, I had conversations with the Prime Minister and conversations with the Chancellor entirely consistent with what we have put in the public domain in terms of our concerns about the future evolution of the European Union.
Our concerns are about the potential evolution of the euro area and how that could affect our tools. I have had detailed conversations with the Prime Minister about those aspects.
In terms of a transfer union I would put it at less than five (on a scale of one to 10), certainly, and this is the great challenge.
CARNEY ON BENEFITS OF “PASSPORTING” WITHIN EU FOR BANKS
There is a reason why a substantial proportion, more global banks, more internationally active banks are headquartered in London than any other European country, or all other European countries combined. That’s partly because of the cluster of expertise that is here but also, in many cases, and I have had numerous conversations with CEOs who affirm this, that is because of the passporting ability of this economy in terms of the activities.
CARNEY ON HOW UK COULD TRY TO REPLICATE BANK PASSPORT REGIME
The analysis terms would turn on the relationship that was negotiated with the rest of the European Union if there were to be a vote to leave. Fundamentally in its broadest terms, the question is what degree of mutual recognition would be accorded to the then UK specific oversight of prudential standards and conduct, standards of conduct, for a variety of firms ranging from banks to insurers to asset managers and others and whether or not a mutual recognition framework could be negotiated that would as much as possible replicate the current passporting regime.
There are challenges in the UK in terms of the productivity of this economy, which is why there is a broader effort across government to improve productivity and that will have to be sustained. But access to the single market provides the prospect of having economies of scale and scope to the application of those technologies. (Reporting by Sarah Young, Costas Pitas and Paul Sandle; Editing by Estelle Shirbon)