2018.11.2010:06:00UTC+00Bank Of England Backs May's Brexit Agreement, Carney Warns Against No Deal Risks

Bank of England Governor Mark Carney welcomed the draft Brexit deal and the transition arrangement that the British Prime Minister Theresa May struck with the European Union last week, but warned that the risks of a "no-deal, no-transition" scenario remained very high.

Speaking at a Treasury Select Committee hearing on Tuesday, Carney said, "We welcome the transition arrangements in the withdrawal agreement."

"We also take note of the possibility of extending that transition period," he added.

The draft Brexit withdrawal deal sees the UK leaving the European Union on March 29, 2019 and the transition period will begin from that day to last until December 31, 2020.

The deal allows for extension of transition beyond 2020 which, according to Carney, was essential as trade deals take an average four years to negotiate.

May's Brexit deal faces stiff opposition from within her Conservative Party and risks failing in the parliament.

Carney warned that the risks of a "no-deal, no-transition" outcome remained "uncomfortably high", and such an event would be the worst for the central bank and the economy.

A no-deal Brexit would serve the UK economy with "a large negative shock", Carney warned. He said the bank has never ruled out a no-deal scenario, though it may be very unlikely to occur.

BoE Chief Economist Andrew Haldane told lawmakers that there are signs that the uncertainty surrounding a no-deal outcome was already impacting business investment and this would translate into "a weaker fourth quarter than the third quarter."

Earlier on Tuesday, the bank brought forward the publication of the latest Financial Stability Report and the results of the bank stress tests to November 28 from December 5.

Along with these, the Bank of England is set to present a detailed assessment of May's Brexit deal to the Treasury Select Committee on November 29.

BoE Deputy Governor John Cunliffe assured lawmakers that even in the event of a no-deal Brexit, a "financial sector meltdown", the sort witnessed during the 2008-09 global financial crisis, will not occur. Most businesses are not prepared for a no-deal Brexit, Michael Saunders, a Monetary Policy Committee member, said at the hearing.

BoE policymakers stressed that the bank will not respond to a no-deal Brexit with interest rates cuts, like it did after the June 2016 referendum.

"That [interest rate moves] depends on the balance of demand, supply and the exchange rate," Carney said. "We could see either scenario."