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Trade tariffs proposed by President Donald Trump would pose a risk to economic growth in countries including the UK, a senior Bank of England official has warned, expressing concern over persistent domestic inflation.
Claire Lombardelli told the Financial Times that uncertainty over the next U.S. president’s trade policy could weigh on growth in the short term, while escalating trade tensions would hurt productivity in the long term. He said it was possible.
“I don’t want to speculate on the specifics, but we know that trade barriers, whether it’s tariffs or regulations or anything else, are not good,” Lombardelli said in an interview.
“Whether you’re an economic historian, an economic theorist, or a data-driven economist, the direction of the impact is clear. As for size, it depends.”
The Bank of England’s deputy governor’s comments on monetary policy came after President Trump vowed to impose a 25% tariff on all imports from Mexico and Canada, as well as an additional 10% tariff on Chinese goods. His threats hit global markets and shocked America’s trading partners.
Lombardelli said it was too early to quantify the effect of President Trump’s proposed tariffs, but that the central bank’s interest rate makers would discuss trade developments at an upcoming meeting.
He said the economic impact would depend on both the policy details and the reaction of America’s partners, adding that it was “less clear” what the measure would mean for inflation.
While Mr. Lombardelli acknowledged that one possible consequence of increasing U.S. tariffs on Chinese imports would be disinflation in other countries as Chinese producers discount their exported products, the impact would be He stressed that it was too early to know because “it completely depends on other countries’ responses.”
Regarding interest rates, Lombardelli said domestically-driven inflation remains a major concern.
Although he said he was less concerned about sustained inflation than when he joined the BoE in July, key indicators of underlying price pressures at home – wage growth and service inflation – remained weak. He warned that there was a lot of attention on him.
“We are concerned that services inflation in this country remains well above the pre-COVID-19 average and well above the rate consistent with our (2%) inflation target,” he said. said.
“Seeing these levels of inflation in services, which are such a large part of the economy, suggests we need to go further.”
Service prices rose 5% in October, higher than economists’ expectations of 4.9% but in line with BoE forecasts. In his speech this week, Mr. Lombardelli cited research that showed wage growth at 4%, which is faster than the 3% pace that is compatible with the central bank’s inflation target.
“The labor market remains tight,” he said. “We go around the country… telling companies how difficult it is to hire people with the skills they need… It’s not as big of an issue as it was two years ago, but it’s still an issue. ”
Mr. Lombardelli declined to say how he would vote in future meetings of the Monetary Policy Committee, but his comments do not suggest he is prepared to support another rate cut in December.
He has voted with a majority of the MPC for two interest rate cuts so far this year, bringing the central bank’s base rate to 4.75%, as policymakers pledge to follow a “gradual” approach to easing. It was put on hold.
“It depends on what we see in the data. To me, gradual means we need to see more evidence that this disinflationary process is continuing before we continue to ease policy. ,” Lombardelli said.
Lombardelli, a former OECD chief economist and Treasury official, is leading reforms to the BOE’s forecasting and communications following a highly critical review by former Federal Reserve Chairman Ben Bernanke.
The new regime includes setting out alternative economic “scenarios” and improving the way the central bank models and develops outlooks. Lombardelli emphasized this week that it will take years for the project to come to fruition.
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He said in an interview that it is too early to say whether escalating trade tensions will be formally included as an alternative scenario for future meetings of the MPC, but in any case the discussion will cover risks around trade. He said it would be.
“We will definitely consider whether it is in our scenario,” he said. “They (trade barriers) are certainly negative for growth in the short, medium and long term. They are negative for productivity. The impact on inflation is less clear.”
Lombardelli added that one of the outcomes of the reforms will be to be able to present alternative scenarios more quickly and easily, which will better inform MPC discussions.
“[Alternative scenarios]are not only a better way to convey uncertainty about what’s actually happening in the outlook, but they’re also a better way to convey reaction capabilities,” she said.
Lombardelli said this could involve alternative interest rate paths resulting from specific scenarios, adding that this could be generated through some kind of rule or “optimal policy approach.” But he downplayed the idea of publishing a path representing policymakers’ core interest rate expectations, saying it could signal a level of certainty among rate setters that “doesn’t exist”.
