Brexit Explains 80% of U.K. Inflation, Former BOE Official Says

 

Brexit Explains 80% of U.K. Inflation, Former BOE Official Says

Adam Posen says he’d back a half-point rate hike in May

Economist says there’s no chance of a U.S.-U.K. trade deal

 

Adam Posen

By Lizzy Burden

27 April 2022 at 14:14 CEST

https://www.bloomberg.com/news/articles/2022-04-27/brexit-explains-80-of-u-k-inflation-former-boe-official-says

 

Adam Posen, a former Bank of England policy maker, said most of Britain’s inflation problem stems from Brexit and that he’d vote for a half-point interest rate increase to curb an upward surge in prices.

 

The economist who heads the Peterson Institute for International Economics in Washington, a prominent research group, said that 80% of the reason why the International Monetary Fund expects Britain’s inflation to remain elevated for longer than its Group of Seven peers is the impact of its departure from the European Union on immigration.

 

“We see a very large gap between the inflation rate in the U.S. and the inflation rate in Europe -- the U.K. ends up in between,” Posen said at a conference hosted by the U.K. in a Changing Europe research group. “You’ve seen a huge drop in migrant labor. When you look at the macro factors, it’s very difficult to see anything other than the labor market issues. It really seems like Brexit has to bear a disproportionate role in explaining the inflation.”

 

In an interview with Bloomberg, Posen said he’d back quicker interest rate increases than the BOE has pushed through so far. Posen was a dovish member of the bank’s Monetary Policy Committee during his three-year term, which concluded in 2012 and covered the aftermath of the global financial crisis.

 

Most economists expect only a quarter-point rise when policy makers meet again next week, moving the key rate to 1%, the highest since 2009.

 

Posen supported the calls of some in the U.K. government to cut tariffs on food imports in order to ease the cost-of-living squeeze. He cited Peterson Institute research on the U.S. showing that reducing tariffs Donald Trump brought in as president would cut inflation about 1.3%.

 

Brexit has added border frictions, increased transport costs and left Britain to negotiate its own trade deals independently of the EU.

 

“You run a trade war against yourself, bad things happen,” he said about the situation in the U.K. “Better to retreat.”

 

Posen also cited foreign direct investment, or FDI, as a weakness for the U.K. He noted the IMF’s diagnosis that part of why Britain will lag its G-7 peers on growth in 2023 is reduced FDI and said Britain is unlikely to ever return to levels reached in the 1990s and 2000s. Those, Posen said, were “thrown away in large part by Brexit and the corroding of the global economy.”

 

He added that there’s no chance the U.K. and U.S. will reach a trade deal. That’s down to the political mood in Washington as well as concerns in the U.S. that the peace deal in Northern Ireland is fraying.

 

“The U.S. Congress … doesn’t want to approve any trade deals of any kind with anybody,” Posen said. “Then you throw in Northern Ireland. This is not going to happen, 100%.”