Bank of England Governor Mark Carney said on Tuesday he expected the British central bank would provide more support for the economy in the event of a no-deal Brexit.
Carney said the BoE's interest-rate setters had stressed that their response to the shock of a no-deal Brexit would not be automatic.
“As my colleague Gertjan Vlieghe has noted, that does not necessarily mean that, in the event of a no-deal, no-transition scenario, either direction of policy is equally likely,” Carney said in an annual report to lawmakers.
“Given the exceptional circumstance associated with Brexit, I would expect the Committee to provide whatever monetary support it can consistent with the price stability remit given to the Committee by Parliament. But there are clearly limits to its ability to do so.”
British Prime Minister Theresa May is still trying to find a deal with the EU that can bridge the divide within her Conservative Party, little more than a month before the scheduled Brexit date of March 29.
Media reports said May was due to rule out a no-deal Brexit and delay Britain's departure from the EU, sending sterling to it strongest since May 2017 against the euro and topping $1.32 versus the dollar.
The BoE has said it might need to raise interest rates after a no-deal Brexit because the likely sharp fall in the value of the pound would stoke inflation pressure, as happened after the 2016 Brexit referendum.
Carney said in his report on Tuesday, published as he addressed parliament's Treasury Committee, that the BoE's tolerance of a sustained overshoot of its 2 percent inflation target could be breached and some tightening might be required.
Two other Monetary Policy Committee members, speaking alongside Carney sounded a note of caution about the risks from inflation after a no-deal Brexit.
Deputy Governor Dave Ramsden said there was little precedent of a shock similar to Britain leaving the EU without a transition deal and he said inflation expectations in Britain had risen, unlike in the United States and the euro area.
MPC member Jonathan Haskel said he was hesitant that the BoE could make good predictions about inflation after a no-deal Brexit.
Carney himself acknowledged that a no-deal Brexit would be inflationary due to new tariffs and trade disruption, and that this would limit the BoE's ability to soften the economic blow.
Separately on Tuesday, the Bank of England said it would increase the frequency of its liquidity operations for banks to weekly from monthly in the weeks around March 29, as it did at the time of the 2016 Brexit referendum to keep the financial system working.