Exploring the Impact of Brexit on Inflation: Bank of England Officials Sound Alarm

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BOE: Brexit Driving Up Inflation and Interest Rates

(Bloomberg) – Two Bank of England officials have warned that Britain’s exit from the European Union is helping to fuel inflation and is one of the factors driving interest rates higher.

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Chief economist Huw Pill said on Monday the trade hit caused by Brexit increases the risk of the UK economy overheating. Earlier in the day, policymaker Catherine Mann said Brexit was a “unique” shock driving inflation in the UK.

The comments are likely to anger some Conservative MPs, who have criticized the central bank for being overly pessimistic about the UK’s prospects after leaving the EU. The BOE last week warned of the economic impact of Brexit, with Pill saying the UK is yet to see any positive impact from the exit.

Pill said historically higher trade had had a positive impact on productivity after the UK scaled back ties with its nearest neighbours.

“When there is less supply in the economy, there is a risk that for the same demand, less supply will drive up inflation,” Pill said in an online Q&A session hosted by the BOE. “The productive potential of the economy in Great Britain is weaker than in the past or growing weaker than in the past.”

The BOE said in last week’s policy report that the impact of Brexit on trade and labor is partly behind a gloomy assessment of the UK’s growth prospects.

Pill said on Monday that a stronger-than-expected hit to goods trade from the UK’s new trading relationship with the European Union has brought forward the projected damage to productivity.

He said this would feed into his rate decisions as the BOE tries to keep demand from outstripping supply.

A new analysis by the BOE last week suggested the trade slump for the economy is coming sooner than originally thought. Since January 2021, trade in goods has plunged 14% in its adjusted numbers, compared to a 7% fall in official data.

However, Pill added that Brexit is just “one aspect that has affected the supply side of the economy”. He pointed to potential labor market constraints from a large number of early retirees and long-term illnesses in the UK since the outbreak of the pandemic.

Earlier in the day, Mann, an outside member of the BOE’s monetary policy committee, said the Brexit shock made the UK “unique” in its attempt to tame price pressures.

“No other country has chosen to unilaterally impose trade barriers on its closest trading partners,” she said.

The BOE chief economist also said in the Q&A:

Pill said he is not yet comfortable calling a “tipping point” in interest rates, as some market commentators have suggested.
He staunchly resisted the idea of changing the BOE’s 2% inflation target, warning that it could cause expectations to unravel.
Pill said that higher home prices are not necessarily “good for the economy” with a sharp drop forecast for 2023.

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–Assisted by Lucy White.

(updates with comments from Pill throughout)