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Brexit to be inflationary, BoE's Carney says

By Alexander Bueso

Date: Monday 18 Sep 2017

Brexit to be inflationary, BoE's Carney says

(ShareCast News) - Brexit will be inflationary in the short-term, the head of the Bank of England said as he reiterated the Monetary Policy Committee's recently adopted stance that some withdrawal of accommodation is likely to be appropriate over the coming months.
Speaking at the International Monetary Fund, in Washington DC, BoE Governor Mark Carney said the process of exiting the European Union was likely to result in increased costs as the inbound supply chains from the EU were disrupted.

Heightened tariffs on UK imports would add further to costs and developments in the labour market, such as a decrease in net migration, might reinforce the impact, he said.

In parallel, equilibrium interest rates at the global level were headed higher too, Carney said, pointing to the expected impact on term premia on benchmark 10-year US Treasury notes from the Fed tapering its balance sheet.

However, Carney also pointed out that Brexit was not about rowing back on globalisation, rather the opposite, but new trading arrangements, for instance, would take time to institute.

In his lecture at the IMF, Carney highlighted how the process of globalisation in which the UK had been immersed now for decades had been a key factor in reducing the sensitivity of inflation to domestic measures of slack in Britain, as the country was integrated into global supply chains.

For example, each one percentage point increase in the import intensity of consumption reduces the sensitivity of inflation to domestic slack by one per cent, he explained, referencing research by Bank.

A number of profound forces in the world economy had served to push down on the level of world real interest rates as well, by as much as 450 basis points, Carney argued.

Indeed, global factors, he said, were the main driver of domestic long-run real rates at both high and low frequencies, with BoE research suggesting that 75% of the movement in UK long-run equilibrium rates was driven by global factors.

A single global factor accounted for over 40% of the variation in domestic financial conditions across advanced economies and in the case of the UK - the world's leading financial centre - the relationship was much tighter, at 70%.

As of 1603 BST, cable was 0.5% lower to 1.3522.


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