Mark Carney has told a press conference today that Brexit is harming the UK before it has even happened and that the country needs a transitional arrangement to its future relationship with the EU.
The comments followed the Bank of England’s decision to hold rates at 0.25 per cent as it downgrades its forecast for UK growth in 2017 to 1.7 per cent, from its previous estimate of 1.9 per cent.
“Brexit-related uncertainties are prompting some companies to delay decisions about building more capacity and entering new markets,” Carney says.
Forty per cent of the Bank’s decision maker panel, which collects information on business conditions, is impacted by Brexit supply chain issues and other uncertainties, the Governor adds.
The MPC currently predicts investment in 2020 to be 20 percentage points lower than what it had forecast before the referendum.
“We see it directly in the macroeconomic numbers. Investment has been weaker than we otherwise would have expected in a very strong world, high degrees of profitability, ample availability and low cost of capital and limited spare capacity. The consequence of that is starting to build.”
While on balance these incentives more than offset the drag from continued uncertainties around Brexit, business investment is still likely to grow below historic averages with adverse consequences for productivity, capacity, and wages, Carney says.
Aberdeen Asset Management chief economist Lucy O’Carroll says Brexit is at the core of every aspect in the Bank of England’s inflation report.
“Brexit even overshadows consumer borrowing, which the Bank has lately sounded worried about.
‘Everyone wants a transitional arrangement’
The MPC’s forecasts are based on the assumption of a smooth exit from the EU with Carney arguing it is in both sides’ interests to have a clear transition to “whatever the end state is”.
All sectors want a transitional arrangement, says Carney, stating it’s not limited to finance or manufacturing or any other area of the economy.
“There is an understanding that there is a series of market access issues, product issues, authorisation issues, data issues, that will affect both sides of what is quite an integrated economy between the UK and the EU27.”