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(Bloomberg) — Bank of England Governor Andrew Bailey said Brexit has \u201ccreated opportunities\u201d for Britain\u2019s financial regulators and has less of an impact on the City of London than expected but warned that the UK faces \u201cfurther large shocks\u201d following the pandemic and war in Ukraine.<\/p>\n
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In an interview with Prospect magazine, he acknowledged that leaving the European Union will have negative economic effects in the short run, but stressed he was an inherent optimist on the UK.<\/p>\n
His comments, which largely balanced short term economic losses with regulatory advantages, marked a contrast with his predecessor Mark Carney, who was recently named chair of Bloomberg LP, the parent company of Bloomberg News.<\/p>\n
Carney was a vocal critic of Brexit. While the BOE estimates that leaving the EU has cost between 3% and 4% of GDP, Bailey\u2019s description of the impact was more upbeat than the previous governor.<\/p>\n
\u201cIt has actually created opportunities,\u201d Bailey said, according to the interview published Wednesday by Prospect. \u201cWe have protected, and in a sense ensured, that much of the market and much of the industry remains here. And that\u2019s been important.\u201d<\/p>\n
In a broad-ranging interview, Bailey also:<\/p>\n
Warned that the UK is likely to be buffeted by more shocks in the coming years as geopolitical tensions escalate.<\/p>\n<\/li>\n
Defended the BOE against critics of its forecasting record and slow-moving response to inflation.<\/p>\n<\/li>\n
Rejected calls for a change to the 2% inflation target.<\/p>\n<\/li>\n<\/ul>\n
\u201cClearly there are more shocks coming out of what is a rather loose term, the geopolitical world,\u201d Bailey said. \u201cWe are a more open economy than a number of others and so we are hit by these shocks.\u201d<\/p>\n
There will be \u201cfurther large shocks that we don\u2019t know about\u201d at the moment. \u201cThis is important, because we have seen these shocks and I think we have to be prepared for whatever comes next.\u201d<\/p>\n
Britain was hit hard by the pandemic and the war in Ukraine as, being an open economy, it experienced both the tight labor markets that the US saw and Europe\u2019s gas price shock.<\/p>\n
On Brexit, Bailey accepted that there had been a hit to growth but stressed he was neutral about the vote. \u201cIn the longer run, you know, those trading relationships adjust in the real economy, and we build new trading relationships. And in the longer run, you adjust for it,\u201d he said.<\/p>\n
\u201cBut in the short run there\u2019s a misalignment, if you like, in that sense. And, you know, if people say, \u201cwell that means he\u2019s obviously a Remainer,\u201d I\u2019ll say, \u201cno, no, I take no position.\u201d But I do feel I have a responsibility to point out the economics.\u201d<\/p>\n
\u201cIf you reduce the openness of an economy, in the short run it will have negative effects. It will have a negative effect on productivity, it will have a negative effect on growth.\u201d<\/p>\n
He dismissed the early apocalyptic warnings about UK financial services being hollowed out as industry moved to Europe. Those have proved mostly unfounded, Bailey said. He noted leaving the EU has allowed the UK to shed regulations that the BOE long opposed, such as the cap on banker bonus payments.<\/p>\n
The governor also provided a spirited defense of the BOE\u2019s forecasting record, which is now under review by former US Federal Reserve chair Ben Bernanke.<\/p>\n
The bank may have misjudged how the economy would respond after the furlough scheme ended but \u201cit wasn\u2019t unreasonable to think there was going to be a quite substantial increase in unemployment,\u201d Bailey said.<\/p>\n
\u201cOur forecasts were always below the average level of the average forecast. So, you know, I conclude from that, look, we were all in it.\u201d<\/p>\n
On changing the inflation target, Bailey said he had been \u201cstruck\u201d on a recent trip to the US by how much more talk there was about it. \u201cBut I do not think the answer is to change the target,\u201d he said. \u201cIt\u2019s actually the representation of price stability.\u201d<\/p>\n
\u201cWhen I look at this question about the shocks that we face and the fact that we might have more volatile inflation for a period of time if we\u2019re in this period of shocks, I don\u2019t think the answer to that question is 3% in terms of the target.\u201d<\/p>\n
–With assistance from Lucy White.<\/p>\n
(Updates with comment from the interview.)<\/p>\n
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