(Adds comments, background)By David Milliken and Andy BruceLONDON, June 26 (Reuters) - Bank of England Governor MarkCarney said the BoE would only cut its economic forecasts toreflect the risk of a no-deal Brexit if Britain's next primeminister makes leaving the European Union without a transitionagreement his preferred policy."In the event that the policy of the government were toswitch, the forecast of the Bank of England would switchaccordingly," Carney told lawmakers on Wednesday.Last week, the BoE acknowledged the disconnect between the"smooth" Brexit scenario that underpins its forecasts and a morechaotic exit from the EU that many investors are increasinglythinking might happen and that could lead to interest rate cuts.Carney, speaking to parliament's Treasury Committee, saidboth candidates to be prime minister - former foreign ministerBoris Johnson and the current incumbent Jeremy Hunt - had saidthey wanted to reach a deal with the EU if possible.His comments suggested the central bank was unlikely to makemajor changes to its underlying Brexit assumptions during itsnext round of economic forecasts, due to be published in August.These forecasts underpin the BoE's main message to financialmarkets that interest rates are likely to go up in a "limitedand gradual" way if a Brexit deal can be done.Many investors take a different view, given the slowdown inthe global economy as well as the risk of a no-deal Brexit. Somehave begun to price in the possibility of a rate cut by the BoE.Michael Saunders, one of the nine members of the BoE'sMonetary Policy Committee, denied the difference was hurting thecredibility of the British central bank.
"I don't think it's a communications failure on our side. Idon't think it's a sign of loss of credibility over theCommittee's commitment to the inflation target," he said.But Oliver Blackbourn, a portfolio manager at investmentfirm Janus Henderson, said the BoE's assumption of a smoothBrexit transition looked "increasingly flawed" because Johnsonand Hunt have both said they are prepared to lead Britain into ano-deal Brexit if necessary."Without taking a view on the political outcome - and beingaccused of bias as a result - there is a danger that the Bank'sforecasts may look increasingly detached from day-to-dayreality," he said. Carney repeated his view that the BoE was more likely toprovide extra stimulus for the economy in the event of a no-dealBrexit than to tighten monetary policy.Asked about comments he made last week, when he challenged aclaim by Johnson that Britain could use world trade rules toavoid the hit of EU trade tariffs in the event of a no-dealBrexit, Carney stuck to his position that such a solution wouldonly work if the EU was in agreement."I did not say that there needed to be the withdrawalagreement for GATT 24 to apply. I said there needed to be anagreement," he said when asked about a comment by Johnson onTuesday that Carney had been wrong."There needs to be some form of agreement and an intention,and a credible intention to move towards a free trade (deal) orcustoms union," Carney said. (Reporting by David Milliken and Andy BruceWriting by William SchombergEditing by Louise Heavens)
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