While Brexit could mean interest-rate cuts or other stimulus are needed to support growth, Gieve said Carney, the Bank of England’s (BoE) governor, may also have to be wary of exacerbating a slump in the pound.
“There will be a shock to demand, so that means that there will be something pressing them to make policy more expansionary,” he said in an interview on Bloomberg Television.
“But there will also likely be a fall in the exchange rate and a shock to inflation, which will go the other way.”
Carney has acknowledged this dilemma, saying policymakers could face a “challenging trade-off” between weaker growth and upward price pressure if the UK votes to quit the EU.
In the minutes of their meeting this month, policy makers said Brexit “could materially alter the outlook for output and inflation”.
Establishing trust will be another key challenge for institutions in Britain, said Gieve, who was in charge of financial stability at the BoE during the run on Northern Rock in 2007.
While the BoE and other central banks have tools in place to reassure markets, with interest rates at or near lower bounds their ability to stoke long-term growth in the face of a shock to demand could be limited.
The BoE is already putting defenses in place to boost market confidence and the financial system in the event of Brexit, including a series of extra market operations around the vote to shore up liquidity.
Mr Gieve warned a vote for the UK to leave the European Union would be “a hell of a shock” for financial markets.
Many of the UK’s creditors are working on the assumption that voters will choose to remain in the EU and are not ready for the “earthquake” that would follow a Leave victory, he added.
Meanwhile, European shares and sterling both received welcome boosts yesterday as the likelihood of Brexit retreated.
The pound jumped by 2.3% to $1.46 yesterday, the most since 2008, spurring a global rally in higher-yielding currencies, as polls signaled the campaign for the UK to stay in the European Union was gaining momentum.
Sterling’s volatility diminished as surveys taken after the murder of pro-EU lawmaker Jo Cox showed the “Remain” group recovering lost ground.
The currency’s climb started last Friday, and “polls over the weekend helped, but it still seems 50:50,” said Stuart Bennett, head of Group-of-10 currency strategy in London at Banco Santander SA.
The pound “could drop strongly if next poll shows ‘Leave’ maintaining last week’s figures.”
Bulls also rushed back into the market after three weeks of heavy selling, sending European stocks to their biggest gains since August.