Brexit is making inflation worse for UK: BoE official

Bank of England (BoE) policy maker Catherine Mann waded into the Brexit debate, blaming UK’s departure from the European Union for adding to inflation.
Mann, a US economist who sits on the rate-setting Monetary Policy Committee, said there were signs that the cost-of-living crunch was beginning to turn a corner in the US and the EU — but not yet in the UK.
All three regions had faced shocks to demand and supply driven by the “Covid and lockdown-induced global demand rotation and subsequent supply bottlenecks,” and the energy shock caused by Russia’s invasion of Ukraine, Mann said yesterday at the Lámfalussy Lectures Conference in Budapest.
“However, the UK has also been affected by a third type of shock which makes it unique: no other country chose to unilaterally impose trade barriers on its closest trading partners,” she added.
Her comments are likely to anger some Conservative members of Parliament, who have criticised the central bank for being too pessimistic about the UK’s prospects after leaving the EU.
Inflation in the UK is still at 10.5%, only marginally down from the 41-year high of 11.1% reached in October and still well above the BoE’s 2% target.
In the euro area, however, the rise in the cost of living has fallen back to 8.5%, and in the US to 6.5%.
Addressing inflation rates across the three regions, Mann said: “Is there a turning point already visible in the data? For the US and the euro area, yes; for the UK, maybe stabilisation.”
She explained that the country was suffering from the “worst of all worlds” — Covid, the energy shock, which has been particularly severe for Europe, and an especially tight labour market which has also been seen in the US.
Her downbeat comments come just days after the BoE slashed its estimate of potential output, the economy’s growth speed limit, to 0.7% for the next three years — down from 0.9% in November.
Unveiling the forecasts at its latest MPC meeting last week, it also blamed a “constellation of economic shocks” including Brexit.
Though the BoE does not think the economic cost of leaving the EU has grown, it said more of the impact will now come earlier.
And it reiterated its predictions that the UK’s “level of productivity would be around 3.25% lower in the long run” because of its withdrawal from the EU free-trade area.
Fleshing out the MPC’s forecasts, Mann said Brexit had impacted the growth trend in the UK’s potential supply.
“It appears that increases in early retirement and long-term illness have reduced labour supply and Brexit has reduced trade and investment efficiencies,” she said.
Mann is one of the most hawkish members of the BoE’s nine-member Monetary Policy Committee and this month voted with the majority for a half-point hike in the key rate, which is now at 4%, the highest since 2008. Previously, she sought quicker hikes.
Last week the BoE signalled that it is approaching the end of its tightening cycle to tackle double-digit inflation.
Markets have only fully priced in one further quarter-point increase to bank rate before cuts are considered by the end of the year.
However, Mann said there are few signs of a turning point for UK inflation, warning of “material upside risks” to the outlook on prices. Gilts extended a fall after Mann’s comments, with the yield on two-year bonds rising 12 basis points to 3.37%.
“A tighten-stop-tighten-loosen policy boogie looks too much like fine-tuning to be good monetary policy,” Mann said. “It is both hard to communicate and to transmit through markets to the real economy.”