By William Schomberg and David Milliken
LONDON (Reuters) – Bank of England Governor Mark Carney said the central bank would probably need to pump more stimulus into Britain’s economy over the summer after the shock of last week’s decision by voters to leave the European Union.
Carney also said he would not consider resigning from the Bank if his critics from the referendum’s Leave campaign, who were angered by his warnings of a Brexit hit to Britain’s economy, end up filling a power vacuum in the government.
“In my view, and I am not prejudging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” he said in a speech on Thursday.
Investors were already expecting the BoE to cut interest rates in July or August from an already record low of 0.5 percent – unchanged since 2009 – and ramp up its 375 billion pound bond buying plan too.
Nonetheless, Carney’s clear signal of further action to offset the Brexit shock pushed sterling down by more than 1 percent against the dollar to about a cent above the 31-year low it touched on Monday. The yield on 10-year British government bonds sank to a record low of 0.882 percent.
Carney said the BoE’s Monetary Policy Committee would give an initial assessment of the impact of the referendum’s impact on July 14, at the end of its next scheduled meeting. That would be followed by a full assessment on Aug. 4, when the Bank will deliver a reworked set of forecasts for the economy.
“In August, we will also discuss further the range of instruments at our disposal,” Carney said.
Investors are facing a deeply uncertain political outlook after Prime Minister David Cameron said he would resign after losing a vote which will see the country separate from the EU, which buys almost half of Britain’s exports.
“The lesson from previous shocks is that there’s a value in acting early and acting decisively,” said RBC economist Sam Hill on Carney’s intervention. He said he expects to see a rate cut in July, followed by another in August coupled with a renewed asset purchase plan.
The lack of political leadership has heaped responsibility on the BoE to steer the economy.
Carney angered supporters of the Leave campaign before the referendum with his warnings about the consequences of a Brexit.
In response to a question from a reporter on Thursday, who asked if his position would become untenable if Leave campaigners take control of Britain’s government, Carney said: “The exact opposite.
“It would be irresponsible of me, or any of my other colleagues, to walk away from those obligations, because those are our obligations under statute,” he said.
In his speech, delivered in the Bank’s ornate Court Room, Carney said there were limits to how low the Bank could cut rates. “As we have seen elsewhere, if interest rates are too low or negative, the hit to bank profitability could perversely reduce credit availability or even increase its overall price.”
Carney said a first wave of contingency measures drawn up by the Bank and Britain’s finance ministry were “working well”.
He also said the Bank had “a host of other measures and policies” to steer the economy and Britain’s vast banking sector through the shock triggered by the referendum result.
Other central banks hold a clue to the options open to the British central Bank.
The BoE, which purchased small quantities of corporate bonds when it first started its quantitative easing program in 2009, could follow in the footsteps of the European Central Bank by buying them on a larger scale.
The BoE could also take further credit-easing steps to reduce the cost of bank loans to help spur investment.
The Bank will hold weekly sterling liquidity auctions between now and the end of September – instead of monthly – as a precaution in case banks run into problems getting hold of cash.
But Carney warned that central bankers on their own would not be able to eliminate the referendum shock and Britain’s economic growth prospects would be driven by “much bigger decisions; by bigger plans that are being formulated by others”.
He said it was important that Britain’s relationship with the EU was clarified as quickly as possible, including a decision on how open it will remain to migration, one of the most sensitive issues for British voters.
Carney and his fellow BoE policymakers will not have much hard data on how Britain’s economy has responded to the referendum jolt when they meet next month. Surveys of Britain’s manufacturing, construction and service sectors, covering the month of July, will be published only in early August.
(Additional reporting by Andy Bruce and Patrick Graham; writing by William Schomberg; editing by Mark Heinrich; Editing by Hugh Lawson)