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Brexit: a path to cake and consumption?


Brexit was the focal point for the Chancellor of the Exchequer’s annual Mansion House speech. Philip Hammond called for a “Brexit for Britain” that includes a comprehensive free trade agreement for goods and services, encompassing a “pragmatic” approach to the UK’s export of its financial services. He cautioned against protectionist attitudes, and advocated “frictionless customs arrangements” to facilitate trade across borders, particularly the border between Northern Ireland and the Republic of Ireland. Mr Hammond urged both the UK and the EU to negotiate “mutually beneficial transitional arrangements to avoid unnecessary disruption and dangerous cliff edges”. Looking ahead, the UK is likely to need a period of implementation in which existing customs border arrangements should remain in operation until new arrangements have been put in place.

Brexit also loomed large in the speech of Governor of the Bank of England (BoE) Mark Carney, who commented, “Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption”.

The Governor joined Mr Hammond in cautioning against protectionism, warning, “Excessive trade and current account imbalances are now politically as well as economically unsustainable”. Mr Carney believes that global imbalances are partly caused by the imbalance between trade in goods and services: barriers to services trade are up to three times higher than barriers to the trade of goods. This is good for net exporters of goods, such as China and Germany, but detrimental to countries with service-based economies, such as the UK and the US.

Mr Carney made it clear that he does not want to tighten monetary policy until he can fully evaluate the UK’s reaction to the prospect of “tighter financial conditions and the reality of Brexit negotiations”. In particular, he warned that monetary policy “cannot prevent the weaker real income growth likely to accompany the transition to new trading arrangements with the EU”, although it could influence the way in which the effect on incomes is distributed between job losses and higher prices.

Nevertheless, pressure for higher rates appears to be mounting amongst BoE policymakers. Rates have remained at an all-time low of 0.25% since August 2016; however, three of the eight members of the Monetary Policy Committee (MPC) voted for a rate increase at the MPC’s June meeting.

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