UK must keep trade open and EU close in fragmenting world, Bank of England's Bailey says

By Andy Bruce

(Reuters) -Britain should stand up for free trade and rebuild ties with the European Union as the global economy fragments, Bank of England Governor Andrew Bailey said in a speech on Thursday that cast an eye towards Donald Trump's White House return.

Bailey said a commitment to open trade was vital to boost weak investment in Britain and restore productivity growth, along with an unlocking of capital from businesses and pension funds, something planned by finance minister Rachel Reeves.

Brexit - which was backed by voters in 2016 and took effect in early 2020 - had contributed to a weakening of Britain's trade flows and weighed on the potential productive capacity of its economy, Bailey said.

"As a public official I take no position on Brexit per se. That's important. But I do have to point out consequences," Bailey said in his annual Mansion House speech to financial services leaders in London.

"It underlines why we must be alert to and welcome opportunities to rebuild relations while respecting the decision of the British people."

While the new Labour government has ruled out rejoining the EU's single market or customs union, Prime Minister Keir Starmer has said he wants to improve trade ties and diplomatic relations with the bloc.

Finance minister Rachel Reeves, speaking just before Bailey at the same event, said Britain needed to "reset" its relationship with the EU and that she also looked forward to working closely with Trump to strengthen trade ties.

Bailey said Britain needed to look at the wider picture for growth, and not just the impact of Brexit.

While Bailey did not refer directly to the U.S. election in his speech, policymakers around the world are still digesting Trump's victory and the prospect of double-digit tariffs on goods imported by the United States.

These would have far-reaching implications for global trade and inflation, the BoE governor said.

"The picture is now clouded by the impact of geopolitical shocks and the broader fragmentation of the world economy," Bailey said.

"Amidst the important need to be alert to threats to economic security, let's please remember the importance of openness... We must do what we sensibly can to preserve safe openness of the economy," Bailey said.

Earlier on Thursday, fellow BoE rate-setter Catherine Mann, who is a U.S. economist, said the BoE should keep interest rates on hold until upside risks to inflation - including those posed by the election of Trump - dissipate.

Bailey said he backed finance minister Reeves' plans to boost public investment announced in a budget two weeks ago.

But he agreed with the government's budget forecaster that the budget measures alone would not raise long-run potential economic growth in Britain by much.

"That needs to be accompanied by stronger business investment... And that business investment will depend on quite a few things including good public infrastructure," he said.

(Additional reporting by David Milliken; Editing by Andrew Heavens and Lincoln Feast.)