Brexit could damage UK productivity and force rapid interest rates rise, warns Bank of England deputy governor

Ben Broadbent's speech may be seen as another hawkish nudge from Threadneedle Street to markets

The deputy governor also said uncertainties over Brexit are putting companies off further investment in the country (Reuters)

Brexit is likely to damage the UK’s productivity and could well force a more rapid rise in interest rates, a deputy governor of the Bank of England has warned.

In a speech on Wednesday, Ben Broadbent said that it was wrong to assume that the impact of leaving the European Union would negatively impact our national productivity (or output per hour worked) only gradually or in the longer term.

Instead, the former Goldman Sachs economist warned that the damage could be done relatively soon and might force a monetary policy response from the Bank to keep inflation under control.

“If EU withdrawal results in significant new barriers to trade between the UK and its major trading partners in the rest of Europe, one plausible consequence would be a marked shift in relative demand for UK output,” he said.

“A plant used to produce a particular car part, as part of an integrated European supply chain, cannot suddenly be converted into one that makes a complex German machine tool. A field currently producing barley, sold into the European market, can’t easily or as fruitfully be replanted with olive trees. Someone steeped in one particular area of financial services cannot overnight, or costlessly, be reborn as an expert widget-maker, able to generate the same contribution to GDP.”

He cited recent surveys pointing to the possibility that some UK-EU supply chains are already unwinding in anticipation of Brexit in 2019 and that firms are on the verge of activating contingency plans to cope with a no-deal scenario.

Such a hit to supply could, Mr Broadbent warned, prompt the Bank to raise interest rates even if the overall economy suffers a sharp slowdown in GDP growth.

“Reductions in supply can add to inflationary pressure even as they also lower aggregate GDP,” he said.

The Bank of England raised interest rates for the first time in a decade last week in order to curb what it saw as incipient domestic inflationary pressures in the economy.

But sterling fell after the decision, reflecting the fact that many financial market traders are doubtful that the Bank would continue gradually raising rates over the coming years if the economy slows sharply in the run-up to Brexit in March 2019.

Mr Broadbent’s speech may be seen as another hawkish nudge from Threadneedle Street to markets.

Productivity surged by 0.9 per cent in the third quarter of 2017, the ONS estimated on Wednesday.

But it remains barely higher than its level in 2007 and the Office for Budget Responsibility has signalled that it will downgrade its productivity forecasts again over the coming years at the Budget next week.