Bank of England Governor Mark Carney said on Friday Britain faces an "uncomfortably high" risk of leaving the European Union with no deal, comments that drove sterling to an 11-day low against the dollar.
With less than eight months until Britain quits the EU, the government has yet to agree a divorce deal with Brussels and has stepped up planning for the possibility of leaving the bloc without any formal agreement.
"I think the possibility of a no deal is uncomfortably high at this point," Carney said in an interview with BBC radio. "People will have things to worry about in a no deal Brexit, which is still a relatively unlikely possibility but it is a possibility."
Sterling slid below $1.30 on the comments and touched a low of $1.2985, while British government bond prices rose.
If Britain fails to agree the terms of its divorce with the EU and leaves without even a transition agreement to smooth its exit, it would revert to trading under World Trade Organization rules in March 2019.
Most economists think that would cause serious harm to the world's No.5 economy as trade with the EU, Britain's largest market, would become subject to tariffs.
"Parties should do all things to avoid [a no deal Brexit]," Carney said on Friday.
Supporters of Brexit say there may be some short-term pain for Britain's $2.9 trillion economy, but that long-term it will prosper when cut free from the EU, which some of them cast as a failing German-dominated experiment in European integration.
Project fear?
Prime Minister Theresa May must find a way to strike a deal with the EU, which has already rejected her preferred plan on trade, then sell that deal to her deeply divided Conservative Party, before putting it to a vote in parliament.
Failure at any of those three hurdles could cost May her job.
Carney said consumer prices were likely to rise in the case of a no-deal Brexit as companies enacted contingency plans to keep supply chains operating.
His comments drew the ire of Brexit campaigners, who have long criticized Carney for sounding too downbeat.
"No deal is the language of Project Fear," lawmaker Iain Duncan Smith, a Brexit supporter and former leader of the Conservative Party, told the BBC.
"There is no such thing as a no-deal, as the [WTO] is where the EU and the UK are already and as a rule-based organization, both sides would have to abide by those rules."
On Thursday the BoE raised interest rates to a new post-financial crisis high of 0.75 percent but signaled it was in no hurry to raise them further.
Carney told the BBC on Friday that the BoE did not raise rates so it could have more ammunition later if a downturn emerged following a disruptive form of Brexit.
He hinted that interest rates are likely to rise to around 1.5 percent over the next three years, based on the expectations of financial markets.
"That's not a prediction, that's not a guarantee, but that's not a bad rule of thumb given the current state of the economy and the momentum in the economy," Carney said.
