Mark Carney, governor of Bank of England, said in his recent speech at the International Monetary Fund in Washington, that Brexit may result in a weaker economy, higher inflation, and higher interest rates. Carney’s comments came after the Bank’s Monetary Policy Committee (MPC) issued a surprise warning that it could raise interest rates as early as November. Carney assured that though Brexit may cause inflation but the rate-setting panel will take necessary action to curb such trends.


Carney warned that Brexit is a step towards de-globalisation that will hamper UK’s economic growth. He said that "It will proceed rapidly not slowly. Its effects will not build by stealth but can be anticipated." If there is a fall in the number of immigrants coming to the UK, it could also push up inflation and force the banks to raise their borrowing rates. He said that "Abrupt decreases in migration could result in shortages in some sectors that have become reliant on migrant labour, and contribute more materially to inflationary pressures.” 

He added, that while economic growth remained relatively resilient so far, it could take many years for the full impact of the transition to be felt by the UK economy, pointing out that any fall in the value of the currency could take as long as four years to feed into domestic prices.

Carney said,” If the economy continues to follow a path consistent with the prospect of a continued erosion of slack and a gradual rise in underlying inflationary pressure then, with the further lessening in the trade-off that this would imply, some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target.”

However, Carney also suggested that “wages could rise faster if the UK left the EU, suggesting the Phillips Curve could steepen as a result.” Philips curve is a measure of the trade-off between inflation and employment.


Carney spoke about effects of trade as well. He ruled out that Britain would be able to offset any loss of trade ties with the EU by striking new agreements with other countries, as it will take time for businesses to adapt to any new rules.


The reduction and reorientation of trade is “likely to weigh on productivity for some time”, he said, while the actual impact will depend on how quickly any lost access to Europe is replaced by other arrangements. The governor also pointed to an increase in UK exports that only go to manufacturers in the EU, before being sold on to end buyers. This has the potential to limit Britain’s ability to trade directly with other countries. “The UK doesn’t so much export to Europe as through Europe; it is a supplier of components to final goods that are exported beyond the continent,” he said. 


Carney stated that there was only so much the Bank could do with interest rates. He said, "It is critical to recognise that Brexit represents a real shock about which monetary policy can do little. "Monetary policy cannot prevent the weaker real incomes likely to accompany the move to new trading arrangements with the EU, but it can influence how this hit to incomes is distributed between job losses and price rises. And it can support UK households and businesses as they adjust to such profound change." 


On balance, he said inflation remains likely to overshoot the Bank’s 2% target over the next three years, forcing the MPC’s hand. Other central banks around the world are also seeking to raise interest rates, which means “the case for a modest monetary tightening is reinforced”. He added that ” Any prospective increases in bank rate would be expected to be at a gradual pace and to a limited extent, and to be consistent with monetary policy continuing to provide substantial support to the economy."