(Feb 10) : President Donald Trump’s trade wars are contributing to UK inflation as China raises prices on exports to Britain to recover the cost of US tariffs, Bank of England policymaker Catherine Mann said.
In a speech at the Global Interdependence Center in California, Mann dismissed arguments that the UK will benefit from disinflation as China diverts trade from the US, while comparing Britain’s pedestrian growth rate to a “horse and pony.”
One of the reasons why US inflation has not risen sharply despite a near US$300 billion increase in import duties “is because import prices going into the US have been falling,” Mann, an external member of the BOE’s Monetary Policy Committee, said on Monday. “In contrast, everybody else is paying more. That is true for the UK as well.”
China is selling less to the US since its goods were hit with huge levies last year. It has lowered prices to retain a presence in what continues to be a vital export market, Mann argued. “Prices going into the US market have fallen and prices going into other markets have increased,” she said, citing evidence in the trade data.
Her comments contradict assumptions made shortly after Trump launched his trade war in April last year. At the time, many economists argued that trade diversion would result in lower prices elsewhere as China redirected goods from the US and flooded other markets.
Mann’s own external MPC colleague at the BOE Alan Taylor made the argument last month, saying price pressures were easing in the UK as penal US tariffs on Chinese goods had forced Beijing’s hand.
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Mann said the BOE has embedded the assumption that the US trade war with China is pushing up UK prices in its latest forecast, which shows import prices adding to inflation.
Last week, Mann voted to hold interest rates in the UK at 3.75% and signalled she is increasingly worried about weakening economic activity and could support a rate cut shortly. Last week’s decision was a close call, with 5-4 in favor of a hold.
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Brexit “continues to be a drag on the UK economy,” she said, and warned that “continuing sluggishness in consumer spending, in business investment, in productivity growth” are holding back Britain by limiting how fast the economy can grow before triggering inflation.
“I would really like to be driving a race car, or at least something other than a horse and pony,” she said, in reference to her role as a UK central banker helping to steer the economy.
Mann said there has “been a little bit of trade diversion to the UK but really not very much.” While that may mean slightly higher prices as Chinese manufacturers rebuild their margins at the expense of UK consumers, the damage to domestic industry is less of a worry than in Europe, which has seen more trade diversion.
uploaded by Isabelle Francis
