Borrowing forecast

Bank economist blames Brexit for UK inflation

Bank of England
The Bank of England will need to raise rates in short term

Bank of England chief economist Huw Pill said today that Brexit has contributed to a skills shortage that has weakened the UK economy compared with other countries.

He told a business gathering today that although immigration soared last year, many of the incomers had arrived as students, not as workers.

The Chancellor Jeremy Hunt has noted that 600,000 people left the jobs market during the pandemic and this gap has not been filled, forcing firms to drive up wages as they compete for workers. This was contributing to inflation.

Mr Pill said the Bank has “more to do” on raising interest rates to control rising costs, but that borrowing costs may not rise as much as financial markets have priced in.

He said he expects UK inflation to start falling next year, assuming natural gas prices stabilise and then start to drop.

He told a conference organised by accountancy body ICAEW that the Bank is concerned about tightness in the labour market, which risks fanning inflationary pressures.

“We are expecting to see headline inflation tail off in the second half of next year, in fact, quite rapidly on account of those base effects” he said.

“There’s a lot of uncertainty around the outlook for gas price developments.”

Inflation in Britain is being pushed higher by elevated energy prices caused by Russia’s invasion of Ukraine and strong wage growth, a “worst of both worlds” dynamic, Mr Pill said.

But while Europe and the US are also likely to tip into recession, both are suffering from just one of those factors, not both at the same time like the UK. 

The Bank has raised interest rates for eight months in a row to 3%, including the biggest rise in 33 years earlier this month.

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