A sharp fall in migrant workers coming to Britain as a consequence of Brexit could push up wages and cause a spike in inflation in the short term, according to the governor of the Bank of England, quoted by the Guardian. 

Mark Carney was setting out his view on inflation days after the Bank’s rate-setting panel indicated it could raise interest rates for the first time in a decade.

Carney said the rapid deceleration of migrant labour could lead to shortages for employers, pushing up wage growth and inflation in the short term. However, in the long term, higher levels of immigration did not push down wages or inflation, he said.

In a speech in Washington, he said: “Abrupt decreases in migration could result in shortages in some sectors that have become reliant on migrant labour, and contribute more materially to inflationary pressures.”

In the longer term, “Brexit could therefore ultimately have only a modest impact on prices in general equilibrium”.

Carney’s intervention is significant as it follows a period of intense political debate about the impact of EU migration on wages and employment in Britain, after a copy of the government’s post-Brexit immigration blueprint was leaked to the Guardian earlier this month.

Vince Cable, the leader of the Liberal Democrats, claimed Theresa May suppressed Home Office reports that found little evidence of immigration lowering UK wages.

Although the governor argued there would be no long run impact on jobs and wages from Brexit discouraging EU workers, his speech is likely to be seized upon by Brexiters arguing for tighter immigration controls.

But he also diffuses another argument – that Britain would be able to offset any loss of trade ties with the EU by striking new agreements with other countries, as it will take time for businesses to adapt to any new rules.

The reduction and reorientation of trade is “likely to weigh on productivity for some time”, he said, while the actual impact will depend on how quickly any lost access to Europe is replaced by other arrangements.

The governor also pointed to an increase in UK exports that only go to manufacturers in the EU, before being sold on to end buyers. This has the potential to limit Britain’s ability to trade directly with other countries. “The UK doesn’t so much export to Europe as through Europe; it is a supplier of components to final goods that are exported beyond the continent,” he said.

Carney’s comments come after the Bank’s monetary policy committee (MPC) issued a surprise warning it could raise interest rates as early as November. Speaking in support of that stance, he described Brexit as inflationary, while saying that the rate setting panel has a responsibility to curb such trends.

On balance, he said inflation remains likely to overshoot the Bank’s 2% target over the next three years, forcing the MPC’s hand. Other central banks around the world are also seeking to raise interest rates, which means “the case for a modest monetary tightening is reinforced”.

Threadneedle Street has previously talked up the likelihood of a rate hike only to not follow through. But this time, there have been indications from Carney, as well as previously dovish MPC members such as Gertjan Vileghe, who was previously considered the Bank’s strongest opponent of a rate hike.

The pound, which surged to its highest level since the Brexit vote in June 2016 on Friday after Vileghe made the case for rate rises, slipped back 0.8% against the dollar on Monday after Carney signalled that any hikes would be gradual and limited.

While there has been a slowdown in the number of EU workers coming to Britain and fears raised over labour shortages raised by business leaders, the numbers do not yet point to a sharp decline.

Figures from the Office for National Statistics show the rate of increase in EU workers coming to Britain is slowing – although yet to retreat in absolute terms. There was however a 1.1% drop in the number of workers from eight of the EU’s most recent eastern European member states, including Poland and the Czech Republic, to 997,000 in the three months to June from the same period a year ago.

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