Governor Mark Carney said the BoE did not expect a disruptive no-deal Brexit, but if it happened, the central bank would be in uncharted territory and it was not possible to predict if rates would need to rise or fall in response.

Brexit is dominating the outlook for the world’s fifth-largest economy which has slowed since 2016’s referendum. “Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply, and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction,” Carney told a news conference.

The BoE cut rates and ramped up its bond-buying programme after the shock referendum vote. Carney cautioned against assuming it would do the same in the event of a no-deal Brexit. Unlike 2016, inflation is above target and the BoE would be responding to actual economic damage, not a fall in confidence. Sterling would probably fall and push up inflation. Combined with a hit to supply chains and possible trade tariffs, that would argue for raising rates, Carney said.

On the other hand, policymakers would need to balance the hit to growth from lost trade, uncertainty, and tighter financial conditions. That would normally make a case for lower rates.

The BoE penciled into its forecasts the bets in financial markets that there will be almost three quarter-point rate rises over the next three years. That compared with just over one in the forecasts that accompanied August’s rate rise.

Asked whether investors were pricing in enough rate hikes, Carney pointed to the BoE’s forecast that inflation would still be above its target in two years’ time, suggesting he thought investors were being a bit too cautious about the pace of hikes.

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