(Bloomberg) — Bank of England Governor Andrew Bailey said Brexit has “created opportunities” for Britain’s financial regulators and has less of an impact on the City of London than expected but warned that the UK faces “further large shocks” following the pandemic and war in Ukraine.
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In an interview with Prospect magazine, he acknowledged that leaving the European Union will have negative economic effects in the short run, but stressed he was an inherent optimist on the UK.
His comments, which largely balanced short term economic losses with regulatory advantages, marked a contrast with his predecessor Mark Carney, who was recently named chair of Bloomberg LP, the parent company of Bloomberg News.
Carney was a vocal critic of Brexit. While the BOE estimates that leaving the EU has cost between 3% and 4% of GDP, Bailey’s description of the impact was more upbeat than the previous governor.
“It has actually created opportunities,” Bailey said, according to the interview published Wednesday by Prospect. “We have protected, and in a sense ensured, that much of the market and much of the industry remains here. And that’s been important.”
In a broad-ranging interview, Bailey also:
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Warned that the UK is likely to be buffeted by more shocks in the coming years as geopolitical tensions escalate.
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Defended the BOE against critics of its forecasting record and slow-moving response to inflation.
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Rejected calls for a change to the 2% inflation target.
“Clearly there are more shocks coming out of what is a rather loose term, the geopolitical world,” Bailey said. “We are a more open economy than a number of others and so we are hit by these shocks.”
There will be “further large shocks that we don’t know about” at the moment. “This is important, because we have seen these shocks and I think we have to be prepared for whatever comes next.”
Britain was hit hard by the pandemic and the war in Ukraine as, being an open economy, it experienced both the tight labor markets that the US saw and Europe’s gas price shock.
On Brexit, Bailey accepted that there had been a hit to growth but stressed he was neutral about the vote. “In the longer run, you know, those trading relationships adjust in the real economy, and we build new trading relationships. And in the longer run, you adjust for it,” he said.
“But in the short run there’s a misalignment, if you like, in that sense. And, you know, if people say, “well that means he’s obviously a Remainer,” I’ll say, “no, no, I take no position.” But I do feel I have a responsibility to point out the economics.”
“If you reduce the openness of an economy, in the short run it will have negative effects. It will have a negative effect on productivity, it will have a negative effect on growth.”
He dismissed the early apocalyptic warnings about UK financial services being hollowed out as industry moved to Europe. Those have proved mostly unfounded, Bailey said. He noted leaving the EU has allowed the UK to shed regulations that the BOE long opposed, such as the cap on banker bonus payments.
The governor also provided a spirited defense of the BOE’s forecasting record, which is now under review by former US Federal Reserve chair Ben Bernanke.
The bank may have misjudged how the economy would respond after the furlough scheme ended but “it wasn’t unreasonable to think there was going to be a quite substantial increase in unemployment,” Bailey said.
“Our forecasts were always below the average level of the average forecast. So, you know, I conclude from that, look, we were all in it.”
On changing the inflation target, Bailey said he had been “struck” on a recent trip to the US by how much more talk there was about it. “But I do not think the answer is to change the target,” he said. “It’s actually the representation of price stability.”
“When I look at this question about the shocks that we face and the fact that we might have more volatile inflation for a period of time if we’re in this period of shocks, I don’t think the answer to that question is 3% in terms of the target.”
–With assistance from Lucy White.
(Updates with comment from the interview.)
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