Mansion House official residence of the Lord Mayor of the City of London, Photo from Shutterstock.

The Governor of the Bank of England has said that interest rates would not rise soon amidst Brexit uncertainty and fears of a weakening economy. While three policymakers at the Bank of England voted to raise interest rates last week, Carney has made it clear today that such a possibility is not a viable option in the coming months. The pound immediately dropped after Carney’s speech. His speech, along with the one by the Chancellor of the Exchequer, Philip Hammond, has highlighted the uncertainties of the Brexit negotiations, something that became obvious yesterday after David Davis’ first compromise in Brussels.

Mansion House speech

Speaking at the Mansion House this morning, Mark Carney dampened expectations for a future change in the Bank’s policy by highlighting the UK’s poor economic data and the Brexit clouds looming in the horizon. He remained cautious about the state of the UK economy, stressing the current account deficit and how Brexit would affect businesses, consumers and financial markets. He referred to low wage growth and mixed data on consumer spending and investment.

He said: “From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment. In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”

He explained that “Depending on whether and when any transition arrangement can be agreed, firms on either side of the channel may soon need to activate contingency plans” and that “Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.” Carney mockingly referred to Boris Johnson’s saying that the UK can have its cake and eat it after Brexit, reminding people that treading with caution is wiser than bragging about the certainty of a Brexit success.

He warned about the UK’s deficit and how this would depend on the outcome of the Brexit negotiations: “the UK’s deficit has also been associated with markedly weak investment and latterly with rapid consumer credit growth. This is not an imbalance that is, as yet, funding its eventual resolution. Moreover, despite the large depreciation around the referendum, the extent to which the UK’s deficit has moved closer to sustainability remains an open question, one whose answer depends crucially on the outcome of the Brexit negotiations. Most fundamentally, the UK relies on the kindness of strangers at a time when risks to trade, investment, and financial fragmentation have increased.”

Mark Carney’s speech wasn’t just a cruel reminder that the economy is struggling and there are dangers ahead. It was also a tough message to the rest of us to exercise caution and not increase borrowing, which is already huge, creating a lending bubble that can deflate at a huge cost.

Philip Hammond’s speech

Earlier, Philip Hammond gave his annual Mansion House speech, in which he discussed Brexit and prosperity. He said: “I have said before, and I remain clear today, that when the British people voted last June, they did not vote to become poorer or less secure. They did vote to leave the EU. And we will leave the EU. But it must be done in a way that works for Britain. In a way that prioritises British jobs, and underpins Britain’s prosperity. Anything less will be a failure to deliver on the instructions of the British people.”

He talked about the result of the general election and how the government didn’t win the argument for stronger growth: “Stronger growth is the only sustainable way to deliver better public services, higher real wages and increased living standards. I thought we had won that argument. But I learned in the General Election campaign that we have not. That we must make anew the case for a market economy and for sound money. The case for growth.”

Like Carney after him, Hammond emphasised the relation between the UK economy and Brexit, and how the two were inextricably linked: “I am confident we can do a Brexit deal that puts jobs and prosperity first, that reassures employers that they will still be able to access the talent they need, that keeps our markets for goods and services and capital open, that achieves early agreement on transitional arrangements so that trade can carry on flowing smoothly, and businesses up and down the country can move on with investment decisions that they want to make, but that have been on hold since the referendum.”

He also touched upon some central issues relating to Brexit, but this time the tone and positions were measured and logical, insisting that Brexit should be about jobs and prosperity, in sync with Labour’s own slogan. He said the UK should follow the EU’s custom union rules in the period after Brexit, and that migration would not be totally eliminated. Instead, migration would be managed, something also similar to Labour’s thesis. He also acknowledged that the British people had enough of austerity, but he didn’t offer further solutions to the problem, highlighting the higher taxes and higher borrowing weren’t sustainable in the long term.

Bad first day of school: Brexit talks

Both Carney and Hammond’s speeches are in tune with the disappointing outcome of the first day of Brexit talks where the UK came face to face with the EU’s master of negotiations, Michel Barnier. Barnier said yesterday that the UK was in no position to define the structure of the talks or ask for concessions. He said: “The UK has asked to leave the EU, not the other way around, so we each have to assume the consequences of our decisions and the consequences are substantial.” He also underlined that “I am not in a frame of mind to make concessions or ask for concessions.”

The UK’s Brexit negotiator, David Davis might have threatened in the arrogant manner of Brexiteers such as Gove and Farage, saying, a few months ago, that he would turn the talks into the “row of the summer,” but now he has adopted a calmer, or, defeated manner. As he said, changing his tune, “It’s not how it starts, it’s how it finishes that matters. Nothing is agreed until everything is agreed.”

The Guardian described the UK-EU exchange “bruising,” while the Financial Times said that the UK reversed its position on the order of things discussed with the EU in the Brexit negotiations, and that such a U-turn was “fundamental.” The article pointed out that the UK government will not openly admit this, of course. Ministers and their press officials are pretending ‘nothing has changed.’ But something has changed, and it is significant. The U-turn was fundamental.” In the press conference, Barnier stressed that the UK had accepted the EU’s approach to the timing of discussions, beginning the talks with the divorce issues first. The UK had already lost in its first confrontation with the EU negotiators: it had to compromise. The UK government, having avoided all this time clarifying its plans and not publishing any substantial guidelines, has got itself in a disadvantageous place. Brexit means Brexit for the EU and making its intentions obvious from the beginning it gives it the advantage of playing its cards right: “for the EU, this is Brexit by timetable.” What might have been “the row of the summer” has turned out to be the “row-back of the summer.” (David Allen Green, “The Significance of the Brexit sequencing U-turn”, FT)