Brexit is contributing to a surge in food prices as the country heads into recession, a senior Bank of England policymaker has warned.
Swati Dhingra – the newest member of the Bank’s monetary policy committee (MPC), which sets interest rates – also used an interview with the Observer to suggest that the coming run of central bank rate rises should peak below 4.5%, which is the level that some City investors are expecting. “The market is probably underestimating what damage that [level of interest rates] might cause to the UK economy,” she said.
Dhingra maintains that further aggressive moves to raise the cost of borrowing from the current level of 3% would risk exacerbating Britain’s economic downturn.
The MPC will make its next decision on interest rates on 15 December, after imposing eight successive rises in a year to control inflation.
Dhingra said: “That is what I think we should all be worried about … are we going to end up lengthening and deepening the recession if the tightening continues at the pace it is?”
The trade expert at the London School of Economics (LSE), who repeatedly warned about the damage arising from Brexit before joining the Bank in August, said there were clear signs leaving the EU was adding to soaring prices and weighing down the economy. People “need to be aware of what the economic cost is”, she said.
While the invasion of Ukraine and the fallout from Covid were far more significant drivers of the UK’s cost of living shock, she said, it was important to highlight the damage Brexit had also done. “I’m not going to make a statement about the political choice of it,” she said, but added: “If it was a political choice, and it has some economic cost, then people need to be aware of what that economic cost is. And whether that changes their mind or not is another matter.”
Researchers at the LSE’s Centre for Economic Performance warned last week that Brexit had added almost £6bn to UK food bills in the two years to the end of 2021, with border delays, red tape and other costs increasing the price of food by about 3% a year.
Dhingra said three-quarters of UK imports were from the EU, which meant “naturally, if non-tariff barriers start to kick in there, we are going to see that – not fully but manifest to some degree – in food prices.”
She added: “No matter which kind of analysis you look at”, there was a minimum economic hit from Brexit of 2% of GDP from trade effects alone. This would be amplified further by costs from weaker business investment, lower foreign direct investment, and reduced productivity.
Dhingra is the latest in a line of Bank of England figures who have broken their silence about the negative effects of Brexit on the economy.
The latest Opinium poll for the Observer shows that two-thirds of voters (66%) now believe Brexit has “gone badly” while only 22% think it has gone well. Even Conservative voters are fairly evenly split, with 51% saying it has gone well and 39% that it has gone badly.
Among all voters, a total of 59% want to rejoin the EU (34%) or have a closer relationship while remaining outside the bloc (25%). Only 15% want the status quo and 14% want even less to do with the EU. About 63% believe the UK should have a relationship which would allow it to regain access the EU single market, against 14% who oppose the idea.
In a sign that people increasingly dislike the reality of border controls, 57% support removing all document and identity checks (such as passport controls and documents for exports and imports) while 21% do not.
Dhingra said the fall in the pound immediately after the 2016 referendum had been the biggest depreciation for any of the world’s four major currencies since 1944. It was, she said, “really the big news” in terms of Brexit’s impact, as the depreciation “showed up as reduced real wages as well as through prices going up” as the cost of imports increased.
Meanwhile, uncertainty over UK economic policy since the vote had contributed to “stagnation in terms of business investment”, she said. UK trade with the EU fell sharply after the end of the transition period on 31 December 2020 and Dhingra said there were signs Brexit was still having an impact. “It’s pretty much clear from the data that’s now coming in that there has been a slowdown.”