Tariffs unlikely to spark persistent inflation, Bank of England rate-setter says
Swati Dhingra, a rate-setter at the Bank of England, said Donald Trump’s tariffs would likely push down on domestic inflation as global exporters slashed prices to maintain market share.
Dhingra warned that the UK was “particularly sensitive” to changes in imported costs due to its openness, but suggested that the danger of tariff-induced inflation was relatively low.
“The direct effect of US import costs and dollar strengthening are likely to be offset by reduced global price pressures,” she said in a speech at the National Institute of Economic and Social Research (NIESR).
“Trade diversion away from the US would reduce global price pressures for the UK and the dampening of global economic activity from increased trade barriers and uncertainty would also subdue international price growth,” Dhingra continued.
Her comments reflect the attempt of policymakers to grapple with the potential impact of Trump’s tariff threats.
Trump has already imposed a blanket 10 per cent tariff on imports from China as well as extra duties on aluminium and steel imports. He has promised to impose ‘reciprocal’ tariffs on all of the US’ trading partners in the coming months.
Economists have warned that reciprocal tariffs would cause major economic disruption, although many are sceptical the levies will ever be imposed.
Dhingra argued that UK imports from elsewhere in the world would likely get cheaper as exporters searched for “new markets” outside of the US.
“Given the significant role of the US in the world economy, tariffs of the proposed magnitude are likely to prompt firms that export to the US to lower their prices to retain demand for their products,” she said.
And she argued that the direct impact on UK inflation from the US would be fairly low, despite the close ties between the two economies.
“Whilst the US is the UK’s largest individual trading partner, it accounts for only around 10 per cent of UK goods imports. And the main imports include crude and refined oil that are unlikely to experience cost increases on account of US tariffs,” she said.
“The direct price-increasing effects from US tariffs to UK prices therefore would be less than feared.”
However, if the global economy were to fragment in a “less orderly” way, this could result in more frequent and severe supply disruptions, which would pose problems for monetary policymakers.
“A disorderly fragmentation, where countries scramble to secure alternative suppliers, would risk triggering inflationary pressure in the short term and constraining economic growth in the long run,” she said.
But she suggested this was “too extreme” a scenario and the appropriate monetary policy response would depend on the “specific trade policies and countermeasures implemented”.
Dhingra is the Bank of England’s most dovish rate-setter. She voted to cut interest rates by 50 basis points at the last MPC meeting in February, and has consistently called for a looser policy than many of her peers.
At an event on Monday, she warned that the Bank of England’s preferred ‘gradual’ approach would leave monetary policy in “restrictive territory all of this year,” which was inappropriate while consumption was “pretty weak”.