Bank of England governor Mark Carney has said the pound’s rebound after the Commons vote signals market hope that Brexit can be delayed, but warned over further volatility.
In a hearing with MPs on the Treasury Select Committee, he said financial markets also saw the prospect of the UK crashing out the EU without a deal as having waned.
However, Mr Carney said he did not put “much weight” on short-term market movements and that the market is “waiting”.
The hearing with the Bank’s Financial Policy Committee (FPC) comes after the crushing defeat for Prime Minister Theresa May’s Brexit deal in Parliament on Tuesday night, which initially sparked a steep fall in the value of the pound followed by a marked bounceback.
Sterling has since held largely firm, at just under 1.29 US dollars and 1.13 euros.
Mr Carney said the “sharp rebound” in sterling in the immediate aftermath of the vote “would appear to reflect some expectation that the process of resolution would be extended and that the prospect of no-deal may have been diminished”.
He stressed he was not giving his opinion, but the “market’s initial take”.
He added: “The markets, like the country, are looking to Parliament for direction and one would expect continued volatility.”
The hearing also looked at the risks facing the economy and strength of the financial system following the Bank’s most recent Financial Stability Report.
Mr Carney warned there was set to be a further slowdown in the powerhouse Chinese economy, but that the UK’s exposure was “relatively modest”.
He told MPs the slowdown in China is partly down to US trade tensions, as well as “necessary but difficult” reforms of its shadow banking system.
Mr Carney said: “There are a variety of indications that growth momentum in China is slowing … and will decelerate further during this year.”
He said Chinese growth was likely to reduce closer to 6% this year, but could in time potentially fall to the “high 5% level”.
Mr Carney said the UK had a single-digit trade exposure to China, but “very large and welcome” exposure to China through UK banks.
Anil Kashyap, an external member of the bank’s Financial Policy Committee (FPC), told MPs that a 3% decline in Chinese gross domestic product (GDP) would reduce UK GDP by an estimated 0.5%.
A 10% shock to Chinese GDP would mean a 3% loss to UK GDP, but he said a 10% decline in Chinese growth would be “cataclysmic”.
When asked if China’s slowdown was a bigger threat to the UK economy than Brexit, the Bank’s executive director for risk, Alex Brazier, said: “We don’t rank them. They’re both very important.”
Mr Carney also raised fears that the mounting trade dispute between the US and China would not be resolved any time soon, given the wide-ranging nature of the row.
He said: “These more fundamental issues will take some time to have a meeting of minds about, because the two sides start from very different positions.”