Brexit reality bites as stagflation looms

Brexit reality bites as stagflation looms

The writer is president of the Peterson Institute for International Economics and a former member of the Bank of England’s Monetary Policy Committee

Sometimes, reality bites. The UK outlook for stagflation of rising prices and slowing economic growth this year and next reflects the realities that Brexit has wrought. 

Of course, the Covid pandemic, the difficulties of reopening the economy, and now energy and food price surges are not caused by Brexit. 

But the UK’s vulnerability to those shocks, and therefore the amplification of their inflation impact, is largely due to Britain’s departure from the EU. This is why the Bank of England will end up having to raise interest rates over the next year more than it forecast this month, and even more than markets have already priced in. Given the very hard Brexit, the Bank of England and the UK economy have been dragged part way back to the 1970s. 

By that, the Bank’s Monetary Policy Committee is no longer able to look past external economic shocks as they did during the 1992 European Exchange Rate Mechanism exit or 2009 sterling depreciation. In these cases, they had the luxury of setting monetary policy solely in terms of hard domestic forecast data. But after