The pain of soaring interest rates and inflation is a knock-on effect of the UK’s decision to leave the European Union, former Bank of England governor Mark Carney has said.
Mr Carney said that Thursday’s decision by the Bank’s Monetary Policy Committee to hike its base rate to a 33-year high of 3 per cent was in part forced on it by Brexit.
The rise – which will add hundreds of pounds to monthly mortgage bills – came as the Bank forecast as much as eight successive quarters of recession in the UK, stretching into 2024 in what could be the longest sustained downturn for a century.
Mr Carney told BBC Radio 4’s Today programme that much of the country’s current financial crisis is down to the Covid pandemic and war in Ukraine.
But he said the downturn has also borne out warnings made at the time of the 2016 EU referendum about the impact of Brexit
“What’s happened in the UK and other economies is we’ve had the impact of higher energy prices which has slowed down the rate of pace that the economy can grow, we’ve had the impact of Covid, which has changed the labour market and our capacity to grow,” said Mr Carney.
“And then, of course, in the UK – unfortunately – we’ve also had the near-term impact of Brexit, which has slowed the pace at which the economy can grow.
“The economy is operating at a level above its capacity and that’s adding to the inflationary pressures that we’re getting from the war in Ukraine and elsewhere. And the bank needs to slow the economy, which is why it’s raising interest rates.”
Mr Carney said that it was clear that the UK economy was weaker as a result of Brexit.
“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,” he said. “It hasn’t recovered. It’s fluctuated around but it has not recovered.”
Brexit had delivered “a long-standing shock to productivity in the economy”, he said.
“It was predicted that we would get that. It’s coming to pass.
“This is what we said was going to happen… 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.”
Brexit has caused a “structural shift”, reducing the size of the UK economy in relation to similar countries in purchasing parity terms, said Mr Carney.
“That structural shift is in part what the government and all of all of us are dealing with in the UK, which is that we’ve had a big hit to our productivity, the capacity in the economy, 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’s one of the consequences of a decision taken a few years ago.”
