The Bank of England cherishes its independence. There is nothing that Threadneedle Street would like more than to retain an Olympian detachment when it comes to the Brexit debate, issuing technocratic reports that are treated as uncontroversial by both sides.
That, of course, is impossible. The Bank has a mandate to safeguard the financial security of the UK and would be failing in its legal duty if it did not point out that there are short-term implications of a vote to leave on 23 June.
Not to put too fine a point on it, the Bank assumes that the financial markets would be thrown into chaos if the public voted to leave. The thinking is as follows: investors hate uncertainty and the global mood is already a bit gloomier than it was at the end of 2015. Even if all were well with the UK economy, there would be the potential for trouble.
But Britain is running an uncomfortably large current account deficit, which effectively shows that the country is living beyond its means. The only way it can do so is if the current account deficit is matched by foreign capital coming into the country to buy UK assets.
In the event of a Brexit vote, the Bank expects that foreign investors will become more nervous (paywall) about buying, or holding, UK assets. Capital will flow out of the country, driving down the level of the pound. And market interest rates will go up, because investors will perceive that UK assets are riskier and demand a higher return as a consequence.
That doesn’t mean that the Bank will be raising official interest rates if David Cameron’s referendum gamble comes badly unstuck. On the contrary, it would almost certainly be thinking about pushing the bank rate below zero and restarting its quantitative easing programme. But the short-term impact of Brexit would be a falling currency and a credit crunch, as funds for borrowers become scarcer and more expensive.
The Bank says, quite rightly, that it is simply talking about what might happen in the event of a prolonged period of uncertainty following a leave vote, and that it is not making any judgments about the long-term pros and cons for the economy of leaving the EU. There might, indeed, be longer-term benefits from a fall in the value of the pound, since that would help the current account by making exports cheaper and imports dearer. The issue of whether the UK would be better off outside the EU in 15 or 20 years’ time if Europe continues to struggle is a lot more nuanced.
But such qualifications are likely to be lost in the cut and thrust of what has become a close and increasingly acrimonious fight. The assessment by the Bank’s financial policy committee will be seized upon by the remain side. Mark Carney, the Bank of England governor, would dearly love to remain above the Brexit fray. But like it or not, he is in the thick of it.
This article was written by Larry Elliott Economics editor, for theguardian.com on Tuesday 29th March 2016 13.57 Europe/Londonguardian.co.uk © Guardian News and Media Limited 2010