Mark Carney said it was reasonable to argue that a combination of a fall in the pound, an increase in the costs of funding the annual deficit and higher inflation would depress growth in the aftermath of a no vote in the EU referendum on 23 June.
Speaking to the economic affairs committee of the House of Lords, he said the impact of the current uncertainty was already being felt in the fall in the number of commercial property transactions, while jittery markets had sent the pound skidding down 10% since the beginning of the year.
He described the assumptions in Monday’s controversial Treasury report that concluded leaving the EU would damage the UK economy as making “broad sense”. Carney added that this was “consistent with [the Bank’s] assessment in general of the impact of openness on the UK economy”.
George Osborne highlighted the report’s conclusion that Brexit could cost the average UK household £4,300 a year by 2030 in lost GDP growth, based on a forecast of the impact on economic activity. The prospects for the jobs market, foreign trade and investments in new technologies were also part of the controversial calculation, the chancellor said.
The chancellor said voters would not consider this was a “price worth paying”, adding there was no other model for the UK that gave it access to the EU single market without quotas and tariffs, while retaining a say over the rules governing it.
Carney said: “A vote to leave the EU might result in an extended period of uncertainty about the economic outlook, including about the prospects for export growth. This uncertainty would be likely to push down on demand in the short run.”
He added that a question mark over the freedom of workers to travel between the UK and the rest of Europe would create uncertainty in the job market, while different arrangements governing foreign trade and capital flows could hit “the rate of technology adoption”.
The Treasury has come under fire from the Vote Leave camp for failing to include in its calculations the costs of remaining inside the EU, which supporters have argued imposes huge amounts of red tape and restrictive rules on the UK and restricts its ability to be competitive in the global economy.
They have also emphasised that a fall in the value of the pound could be beneficial, making UK exports cheaper.
Eurosceptics make up a small contingent on the Lords committee since former Tory chancellor Nigel Lawson quit to help lead the Vote Leave campaign. Another ex-Conservative chancellor, Norman Lamont, remains as an ardent anti-EU figure, alongside Brian Griffiths, a former adviser to Margaret Thatcher.
Lord Griffiths said: “It is a pretty strong assumption to say that there are no benefits from a decision to leave the European Union. So how can you say this is a reasonable assumption, as you did earlier?”
Carney responded: “Any positive impact of a [sterling] depreciation on activity would need to be set against any net negative impacts [whether on investment, consumption, exports or potential supply] stemming from its underlying cause.”
He said the pound could fall, pushing down the value of UK property and other assets held in sterling, which would increase the risks of investing in Britain.
Carney has insisted that the Bank would not attempt to repeat the Treasury’s calculation of the cost of Brexit, but would be forced to calculate the risks to the UK’s financial health in the event of an economic shock.
“These are balances of probability, but the likelihood is that it will become more expensive to fund that deficit [if the UK leaves the EU] and, with a shift in the structure of it, it may mean that for a period the UK economy cannot run as large a current account deficit – it means that there would be less activity in the economy, less growth,” he said.
He was asked whether an increase in interest rates would be dangerous. He replied: “It would unhelpful. It would be pro-cyclical. It would reinforce the slowdown.”
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