Trump's tariffs will hit UK growth but temper inflation, says Bank of England rate-setter

Higher US tariffs on imports are acting as a drag on Britain’s economy and are likely to exert “some downward pressure on prices in the medium term”, according to Swati Dhingra, a member of the Bank of England’s (BoE) Monetary Policy Committee (MPC).

Speaking at a research conference in Ireland, Dhingra said: “In my view, the primary transmission channel of tariffs to the UK in 2025 come through weaker demand, as tariffs act as a drag on global growth.”

She added that the disruption to trade triggered by tariffs “means lower overall growth — and some downward pressure on prices in the medium term.”

UK inflation remained unchanged at a lower-than-expected 3.8% in September. The figure from the Office for National Statistics (ONS) was below the 4% forecast by both the BoE and economists polled by Reuters and marked no change from the 3.8% readings in August and July.

Read more: December interest rate cut eyed by traders as inflation holds

Dhingra, who has previously voted in favour of a faster pace of rate cuts by the Bank of England, also cautioned that excessively high interest rates risk creating longer-term inflationary pressures by limiting investment in new production capacity and productivity improvements.

Traders are increasingly betting on a potential interest rate cut by the BoE in December, according to the latest market data. While most investors expect the BoE to keep rates unchanged at 4% when the Monetary Policy Committee (MPC) meets in November, expectations have shifted toward a 0.25% reduction by the end of the year.

Dhingra further pointed to research published earlier this year showing the services sectors most exposed to Brexit-related barriers had experienced a 16% decline in exports to the European Union, “which were not made up elsewhere.”

Dhingra said: “Brexit has demonstrated the corrosive effect of policy uncertainty on trade, productivity, and business investment.”

The research she cited estimated that UK GDP is between 6% and 8% lower, investment down 12% to 18%, and employment and productivity each down 3% to 4% compared with a scenario in which the UK had remained in the EU.

She said: "From the standpoint of 2025, it’s hard to see that British households and businesses have reaped the putative economic benefits of leaving the EU.

Read more: UK dividends fall as share buybacks drag on growth outlook

"A global pandemic broke out in the intervening period, complicating efforts to identify the impact of Brexit on the development of the British economy. But, nearly a decade after the referendum vote, an emerging body of evidence suggests that Brexit has been a contributing factor to stagnant investment and productivity, as well as a drag on the UK’s trade performance."

Story Continues

In context, the Office for Budget Responsibility (OBR), the government’s independent fiscal watchdog, assessed that Brexit will reduce the country’s long-term productivity level by around 4% compared with remaining in the EU.

Governor of the Bank of England Andrew Bailey last week warned that Brexit will continue to act as a drag on the UK economy for years to come, describing the impact as “negative” for the “foreseeable future”.

Bailey said that putting up trade barriers inevitably damaged growth, noting that the effects of leaving the EU were still feeding through the economy.

While emphasising that he was not offering a personal or political view of Brexit, Bailey said that weak productivity growth over many years had contributed to higher levels of public debt.

He added: “What’s the impact on economic growth? As a public official, I have to answer that question – and the answer is that, for the foreseeable future, it’s negative.”

Speaking in Washington DC, Bailey said the UK economy was adjusting only slowly to new trading relationships following Brexit, with “some partial rebalancing” in trade already under way.

Download the Yahoo Finance app, available for Apple andAndroid.

View Comments