The threat to the UK from a global trade war is “substantial” and would affect the pound in the pocket of ordinary consumers, said the governor of the Bank of England
If US President Donald Trump imposed tariffs on UK imports, it would be bad for British economic growth and lift prices, said Andrew Bailey as he appeared in front of the Treasury Select Committee.
“The risks to the UK economy and the world economy are substantial,” said the governor.
He added that “trade supports growth” and the way to tackle trade imbalances such as China’s current account surplus was through “multilateral forums” and “not by countries acting bilaterally”.
Bailey was in Westminster after the US imposed 25% tariffs on goods imported from Canada and Mexico at the start of the week, with an additional 10% tariff on Chinese imports.
President Trump has previously hinted that he may also impose tariffs on countries that charge VAT, leaving Britain at risk of a £24bn blow to its economy over two years.
The UK has a relatively high VAT rate of 20%, while US sales taxes are relatively low.
Monetary Policy Committee external member Alan Taylor, also appearing before MPs, said uncertainty had “widened” since the last meeting of policymakers in February.
At that meeting, the nine-strong body cut the base rate by 0.25% to 4.5%, amid signs that the UK economy is struggling.
It forecast that inflation, currently at 3%, will rise to 3.7% in the third quarter of this year, before receding.
Bank of England governor Andrew Bailey said last month the committee would adopt a “gradual and careful” approach to rate cuts, which many in the City take to mean at least two more rate cuts this year.
Megan Greene, another external rate-setter told MPs that the, “disinflationary trend that we’ve had is probably on track.”
But she added that, “GDP [growth] has roughly flatlined since March.”
The committee was divided on whether sluggishness in demand or supply had led to an economy in the deep freeze.
Bailey returned to the threat of trade wars sparked by America, calling it “a new episode” in the post-World War Two Bretton Woods free trade economic order.
He said there is a “major shift going on in the US” which the Bank would have to “take very seriously”.
When asked if US trade policy could lead to people having less money in their pockets, the governor answered: “Yes, that’s right… We serve the people, and we have to take it very seriously.”
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