Carney warns Brexit could lead to interest rate rise

The UK leaving the European Union could lead to an interest rate rise. Credit: Toby Melville / PA Wire/PA Images

So far the economic and business part of the war on whether the UK should remain or leave the EU has been characterised by a lot of noise, but the shells fired have largely been duds.

But today there was a significant intervention, by someone who is supposed to be completely neutral, the Governor of the Bank of England.

Mark Carney said that in the event the UK left the EU, or looked as though it would leave, the interest rates we pay here in the UK - what he called in City jargon "the risk premium attached to UK assets - could rise.

Now he would say he was making a statement of the bleedin' obvious, and not intending to influence opinion.

But in a UK where households are still struggling under the burden of near-record debts, the idea that the cost of servicing those debt would rise in the event of Brexit is (ahem) resonant.

I've explained here before why the cost of money in the UK could rise for a period if we leave the EU, and the main reason is that we are not paying our way in the world.

We have a substantial current account deficit, a substantial hole - equivalent to around 4% of national income or GDP - on our trade and investment with the rest of the world.

So to fund our lifestyles, we either have to continue borrowing at a high rate (some would say at an unsustainable rate) from the rest of the world or continue to sell foreign investors substantial amounts of our businesses and property.

Which is why Mark Carney - in a wonderfully resonant phrase - said that our current account deficit makes us rather too reliant on what he called "the kindness of strangers".

Credit: Toby Melville / PA Wire/ PA Images

He is basing his argument on what most economists would see as a truism, namely that there would be an indeterminate period, in the event that British people voted to leave the EU, that the prospects for the UK economy would be quite uncertain, because we would not know the details of our trading relationship with our most important market, the rest of the market.

So investing in the UK would be seen as riskier by overseas investors.

There would be two consequences: the weak pound would become weaker still, and if it became chronically weak, if there were a sterling crisis, the Bank of England would be forced to put up interest rates to ward off inflationary consequences; also overseas investors would charge us more for lending to us.

Or to put it another way, Brexit could pretty rapidly cause a serious economic slowdown, even a recession, as the cost of our huge debts increased.

So Mark Carney has today become a big player in the EU's debate, and - whether he likes it or not - he will be seen as having fired a whopping shell against those who want us to leave.