The Bank of England will be drawn into the debate surrounding UK membership in the European Union as Governor Mark Carney testifies on the matter before Parliament’s Treasury Select Committee. The government has announced that it will put so-called “Brexit†to a referendum on June 23. Carney will be put on the spot to give a view on the economic implications of a rupture with the EU, including potentially adverse shocks to trade and the financial sector.
The BOE issued a report on the impact of EU membership on the central bank’s ability to meet its objectives back in October but carefully avoided weighing in on the politics of the in/out decision. Similarly non-specific rhetoric this time around may be both appropriate and indirectly supportive for the anti-Brexit argument.
First, an exit by a country of the UK’s size and stature would be unprecedented. Needless to say, this means the precise near-term consequences are extremely difficult to confidently predict. Furthermore, if the UK votes to leave the regional bloc, a renegotiation of the two entities’ relationship will follow for a period of up to two years. This will likely prolong and compound uncertainty, which threatens the economy as activity ramps down until greater clarity emerges.
Carney’s articulation of this relatively simple premise may play into the hands of Mr Cameron, who is advocating in favor of the status quo. The uncertainty inherent in a Brexit scenario may spook fence-sitters and push them to side with the government’s position. The latest YouGov voters’ poll shows a 40-37 percent preference for staying in the EU, with 18 percent undecided. A cautious if non-specific tone from the head of the central bank may well push a pivotal proportion of the third group into the “stay†camp. Expectations of such an outcome following Carney’s testimony may boost the British Pound.
Turning to the data docket, a revised set of fourth-quarter Eurozone GDP figures takes top billing.Traders are unlikely to commit to a strong directional bias on the basis of the release however as they await the ECB rate decision later in the week. The outcomes of US debt auctions offering 4-week notes and 3-year bills may also be of note. A pickup in yields against a backdrop of firm demand may imply a hawkish shift in FOMC bets, which could fuel risk aversion.
