The Governor of the Bank of England has warned that the major economic impact of Brexit has yet to be felt, but it was likely to spell a weaker economy, higher inflation and higher interest rates in the coming years.
In his latest attack on Brexit, Mark Carney said that it should be seen as a prime example of “de-globalisation”, adding that it was likely to dampen UK growth, and that any fall in migration numbers could also push up inflation and force the bank to raise borrowing costs.
However, in a speech at the International Monetary Fund in Washington, the Governor surprised those expecting more detail on when and by how much the Bank was likely to raise interest rates, and instead focused on the economic fallout of Britain’s departure from the EU.
Mr Carney said Brexit was “an example of de-globalisation not globalisation”.
He added: “It will proceed rapidly not slowly. Its effects will not build by stealth but can be anticipated.”
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The Governor said any fall in migration following Britain’s departure could push up prices in the UK, saying: “Abrupt decreases in migration could result in shortages in some sectors that have become reliant on migrant labour, and contribute more materially to inflationary pressures.”
Mr Carney also said that while economic growth remained relatively resilient so far, it could take many years for the full impact of the transition to be felt by the UK economy, pointing out that any fall in the value of the currency could take as long as four years to feed into domestic prices.
However, he said that there was only so much the Bank could do with interest rates: “It is critical to recognise that Brexit represents a real shock about which monetary policy can do little.
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“Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises.
“And it can support UK households and businesses as they adjust to such profound change.”
However, Mr Carney’s speech also suggested that wages could rise faster if the UK left the EU, suggesting the Phillips Curve – a measure of the trade-off between inflation and employment – could steepen as a result.
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His speech did not add much detail to the news last week that the Bank’s Monetary Policy Committee is now more open to the notion of an interest rate increase.
He said: “If the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.
“Any prospective increases in bank rate would be expected to be at a gradual pace and to a limited extent, and to be consistent with monetary policy continuing to provide substantial support to the economy.”