Bloomberg's Beyond Brexit1 May 2022 00:24
the assessment of Brexit by former Bank of England policy maker Adam Posen, who has been president of the Washington-based Peterson Institute of International Economics since 2013. He told me that Britain’s exit from the European Union is 80% of the reason why — as the International Monetary Fund forecast last week — U.K. inflation will remain higher for longer than other Group of Seven economies.
The cost-of-living crisis is so dire, Posen said, that despite being an arch dove during his three-year term on the BOE’s interest rate-setting Monetary Policy Committee, he’d now back a 50 basis-point hike at next week’s meeting (if he still had a vote.) That’s more than the quarter-point hike economists are expecting, a move that would still take interest rates back to their highest level since 2009.
A super-sized hike seems less likely — at least to investors — after three sets of gloomy data on Friday suggested the economy is faltering, and the pound fell to its lowest since November 2020. They might have been swayed by current MPC member Catherine Mann, who said last Thursday that how demand holds up will be crucial in determining her vote next week.
Evidence suggests action is needed. Research by the London School of Economics showed Brexit-related trade barriers have driven a 6% increase in U.K. food prices. The Trussell Trust, which supports a network of 1,400 food banks, said British households are increasingly requesting emergency assistance.
One solution to the cost-of-living crisis, Posen said, would be cutting tariffs on food imports, as some in the U.K. government have suggested. They were responding to Prime Minister Boris Johnson’s call for ministers to “do more” to take the pressure off households, even though there will be no new money for the ideas.
There’s also no chance that the U.K. and U.S. will reach a trade deal, said Posen. That’s despite U.K. International Trade Secretary Anne-Marie Trevelyan and U.S. Trade Representative Katherine Tai meeting in Scotland to strengthen trade ties. A deal is “not going to happen,” Posen said.
Lingering tensions over the post-Brexit deal on Northern Ireland explain some of that. Johnson vowed to “fix” diversions in trade resulting from the agreement, but said “all sides” would need to support any solution.
A final thought: As Britain continues to settle into its post-Brexit relationship with the EU, spare a thought for small businesses. Separate research by the LSE found that while exports to the bloc have recovered to pre-Covid levels, the number of British exporters to the EU has shrunk. Small businesses — seen as the backbone of the U.K. economy — don't have the margins to absorb the extra costs of Brexit red tape, the report suggested. An example, perhaps, of Posen's “bad things.”
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