Brexit is an example of deglobalisation, says Carney
Brexit is a unique example of deglobalisation that will hurt Britain’s economy as trade ties with the EU are weakened, leading to higher inflationary pressures even after the effect of sterling’s recent depreciation disappears, Mark Carney said on Monday.
The Bank of England governor said that even though the intention of Brexit was not to close the UK off from the rest of the world that would initially be the main result because trade ties with Europe would be damaged and those with other countries would take time to grow.
This makes Brexit an example of “deglobalisation”, said Mr Carney, which would mean higher prices for consumers and the likelihood of higher interest rates to keep inflation under control.
Mr Carney was delivering the annual Camdessus lecture at the International Monetary Fund in Washington. Speaking about the past 50 years, he said the process of globalisation had led to lower inflation and lower interest rates in many countries.
Better trade integration had improved the supply of goods, services and labour. Brexit, he said, was a “unique” experiment compared with this period. “It will be, at least for a period of time, an example of deglobalisation not globalisation,” added Mr Carney. “It will proceed rapidly not slowly. Its effects will not build by stealth but can be anticipated.”
Saying that retaining existing trade links with the EU “may be challenging”, particularly in industries with integrated supply chains, Mr Carney said Brexit was likely to be inflationary and “these inflationary effects may be reinforced by developments in the labour market” as Britain shifts to a more restrictive immigration regime. He added that productivity was likely to be hit.
“It is critical to recognise that Brexit represents a real shock about which monetary policy can do little,” said Mr Carney, in a tough message to politicians that they should not look to the BoE to get them out of any economic difficulties. “The actual impact [on productivity] will depend on how quickly any lost access to European and third country markets can be replaced.”
His warning that Brexit was likely to prove inflationary did not relate to the current rise in consumer prices, which has been fuelled by the fall in sterling since the UK vote to leave in the EU last year. Instead his remarks were focused on how the UK’s weaker trade ties after Brexit would limit the speed at which the economy could expand.
Any growth after Brexit would therefore be more inflationary than before, and require higher interest rates. Mr Carney noted the BoE Monetary Policy Committee had cut interest rates after the EU referendum, but now the initial shock of the Brexit decision had passed.
In a hawkish message, he added: “This stimulus is working . . . as a consequence the trade-off between inflation and spare capacity is diminishing.” Mr Carney was not seeking to talk up the pound. He said that after Brexit, sterling would reflect changes in the UK’s terms of trade, among other things.