Bank of England governor Carney warns trade war threat hasn’t gone away

Mark Carney has warned of the damage to the global economy from rising protectionism, describing a “widespread slowdown” that may require a major policy response. The Bank of England governor said the “intensification of trade tensions has increased the downside risks to global and UK growth”, citing falling business confidence and pessimism among households.

He also said the UK faces the additional threat of a no-deal Brexit to business investment. The comments sparked a drop in the pound below $1.26 to the lowest level of the day and the weakest since mid-June.

The euro gained over 0.3% to 89.58 pence. Money markets ramped up bets on an interest rate cut by January, now seeing a 60% probability compared with 35% as of the previous day, adding fuel to a surge in UK government bonds.

In a gloomy assessment, Mr Carney said things have changed markedly in the past year, noting that the proportion of the global growing above trend has fallen from four-fifths to just one-sixth. Investors are anticipating that central banks in the US and Europe will shortly open the monetary stimulus taps once again and cut interest rates to support growth.

Mr Carney said such action may be needed but, echoing many of his central bank colleagues, added that governments must also step up with fiscal measures.

For the UK, Mr Carney said that the Bank of England still expects higher interest rates will be needed if Brexit goes smoothly, though it’s “unsurprising” that the market takes a different view given that traders place more weight on the possibility of a no-deal Brexit.

While the US and China agreed a truce in their stand-off at the weekend, president Donald Trump’s administration has since proposed more tariffs on EU goods, a move related to the long-running transatlantic subsidy dispute between Boeing and Airbus.

Global manufacturing is already in a slump, with reports this week showing pronounced weakness across Asia and Europe. The tariffs announced so far will lower UK economic output by 0.1%, said Mr Carney. That would swell to minus 0.4% if all measures, including car tariffs, are introduced.

A big shock to business confidence could take 1% off output. “Monetary policy must address the consequences of such uncertainty for the behaviour of businesses, households, and financial markets,” he said.

Bloomberg. Additional reporting Irish Examiner.