Market News

BY  Mark SweneyPhillip Inman

The governor of the Bank of England has said that the UK now needs to do everything it can to rebuild its long-term trade relationship with the EU, after a breakthrough agreement with the US to reduce some of Donald Trump’s tariffs.

Andrew Bailey said that, while he would not pass judgment on the UK’s exit from the EU in early 2020, reversing the trade impact of Brexit would be “beneficial”.

The government is in talks with the EU – after moves by the prime minister, Keir Starmer, to “reset” trade relations since Labour came to power last year – before a summit in London in 10 days’ time where a new UK-EU partnership is expected to be unveiled.

“Having a more open economy to trade with the European Union … would be beneficial,” Bailey told the BBC, “because there has been a fall-off in goods trade with the EU over recent years.”

The EU remains the UK’s largest trading partner, but in sectors such as food and drink exports have fallen by more than a third since Brexit.

“It is important we do everything we can to ensure that whatever decisions are taken on the Brexit front do not damage the long-term trade position,” said Bailey. “So I hope that we can use this to start to rebuild that relationship.”

Earlier this week, the UK agreed a long-desired trade deal with India. Starmer described the agreement, which took more than three years of negotiations under successive governments, as a “landmark deal” that would cut tariffs and add £4.8bn a year to the UK economy by 2040.

Bailey said the UK’s deal-making was setting an important example to other countries. “It demonstrates that trade deals are important,” he said. “Trade deals can be done, and the trade is important … Honestly, it seems an unpromising landscape at times. But I hope that we can use these deals to rebuild the world trading system.”

The UK-US deal would benefit trade, even though tariffs on most British exports to the US would remain higher than they were before last month, he said later at an economics conference in Reykjavík, Iceland.

He aded: “It’s good news in a world where it will leave the effective tariff rate higher than it was before all of this started.”

Speaking at a conference hosted by the Icelandic central bank, Bailey said Threadneedle Street needed to be “nimble” in its response to developments in the global economy, especially as countries reacted to the increase in US import tariffs.

He said the Bank had maintained a target for inflation of 2% in good times and bad and proved to the public that the aim could be achieved in all economic weathers.

Bailey said: “We need no reminder that the global economic environment is likely to continue to be challenging – and less predictable – than it was in the past.

“So we need to adapt and develop to ensure that our processes are nimble and robust, and that our monetary policy decisions are communicated effectively, while ensuring that we continue to act methodically in response to inflationary pressures.”

On Thursday, the Bank cut interest rates by a quarter point to 4.25% to cushion the UK economy against the impact of rising global economic uncertainty.

The narrative from the Bank’s monetary policy committee, which accompanied the decision, indicated a reluctance to make further rate cuts without greater certainty that inflation would fall back to 2% within the next two years. Inflation stood at 2.6% in March and is predicted to rise later this year.

Business groups and unions said they were dismayed that further rate cuts may not be imminent.

The British Chambers of Commerce (BCC) and the TUC said that the Bank’s economists underplayed the downturn and the need for cheaper borrowing to boost growth.

David Bharier, head of research at the BCC, said surveys showed small and medium-sized businesses’ confidence had fallen in response to “the twin developments of domestic tax rises and a global trade war”.

He said: “Many firms, desperate for financial respite, will be keen to see further rate cuts in the months ahead.”

The TUC said households needed greater support from lower interest rates.