BREXIT is one of the key reasons why the UK’s central bank has been forced to raise interest rates despite an oncoming recession, a former governor of the Bank of England has said.
Mark Carney told BBC Radio 4 that the UK’s exit from the EU had “slowed the pace at which the economy can grow” – and that the value of the pound had never recovered from it.
Carney, a Canadian-born economist who served as the Bank of England’s governor from 2013 to 2020, said the value of the pound had fallen as soon as the 2016 Brexit vote had been announced.
“Sterling moved against all major currencies from the point at which the referendum was called, and then it moved more sharply after the referendum result.
“It hasn’t recovered. It’s fluctuated around but it has not recovered,” Carney (below) said.
The former banking chief, now a United Nations special envoy for climate action and finance, further suggested that the “tough decisions” needed to get the UK economy moving were a consequence of Brexit.
Addressing criticism of his claim, made in the Financial Times in October, that Brexit had seen the UK economy shrink from 90% the size of Germany’s to “less than 70%”, Carney said: “The question is the purchasing ability, the international weight of the economy, which was [pre-Brexit] at a different level relative to the German economy, relative to the Canadian economy, relative to other economies than it is today.
“That structural shift is in part what the government and all of us are dealing with in the UK. We’ve had a big hit to our productivity … the speed limit of the economy as well as the level of the economy, and we have to take some tough decisions in order to get it back up and that is one of the consequences of a decision taken a few years ago.”
Carney said the UK was facing a “long-standing shock to productivity in the economy”, which he said was predicted would be an outcome of Brexit.
He told the BBC: “This is what we said was going to happen, which is that the exchange rate would go down, it would stay down, that would add to inflationary pressure, the economy’s capacity would go down for a period of time because of Brexit, that would add to inflationary pressure, and we would have a situation – which is the situation we have today – where the Bank of England has to raise interest rates despite the fact that the economy is going into recession.”
Carney’s comments come one day after the Bank of England announced the base interest rate will rise to 3% from 2.25%, the highest for 14 years after eight consecutive hikes with more on the horizon.
It will push up mortgage payments by around £73 per month for typical households according to data from trade body UK Finance.
In a caveated forecast the Bank also also warned that the UK could be on course for the longest recession since reliable records began in the 1920s.
Gross domestic product (GDP) could shrink for every quarter for two years, with growth only coming back in the middle of 2024.
The economy has faced similarly long recessions in the past, but then the quarterly drops have been broken up with an occasional positive quarter.
But in a confusing forecast the Bank simultaneously appeared to warn of an eight-quarter recession, while on the other hand saying it would probably not come to pass.
Its forecast was based on the base interest rate reaching as high as 5.2%, which is what the market expected.
But in reality the Bank said it does not expect rates to go nearly that high.
Chancellor Jeremy Hunt said the UK Government would focus on tackling battered public finances to help limit the need for further rate rises but admitted there are “no easy options”.
He said: “The most important thing the British Government can do right now is to restore stability, sort out our public finances, and get debt falling so that interest rate rises are kept as low as possible.
“However, there are no easy options and we will need to take difficult decisions on tax and spending to get there.”
