Update: BOE Carney Sees Inflationary Brexit Effects>

-Adds Quotes From Q and A To Version Transmitted At 1500 GMT

     By David Robinson and Jamie Satchithanantham

     LONDON (MNI) - Bank of England Governor Mark Carney listed the 

likely economic effects of the UK leaving the European Union, saying 

that it will result in a string of inflationary effects including 

reducing investment, squeezing supply and fuelling import inflation but 

these will be curbed by some disinflationary effects. 

     Carney, in a speech at the International Monetary Fund, said that 

with economic slack in the UK being eroded more rapidly than expected 

and with inflation forecast to be above target throughout the Bank's 

three year horizon, a rate hike in coming months was likely. 

     "On the supply side, process of leaving the EU is beginning to be 

felt. Brexit-related uncertainties are causing some companies to delay 

decisions about building capacity and entering new markets," he said. 

     As a result of this reduced investment and weak UK productivity 

"the supply capacity of the UK economy is likely to expand at only 

modest rates in coming years," Carney said. 

     On balance, the de-integration effects from the UK leaving the EU 

are likely to steepen the Phillips curve, the unemployment/earnings 

relationship, and to push up on inflation by disrupting supply chains. 

On the disinflationary side, there is likely to be reduced EU demand for 

UK goods and services and reduced spending. 

     Carney said that while Brexit was ultimately meant to result in 

greater UK openness to trade, its initial effect will be to diminish it 

as trade deals will not be struck fast enough to offset leaving the EU, 

meaning firms would need longer lead times to access new markets. 

     "This makes Brexit, relative to the experience of the past half 

century, unique. It will be, at least for a period of time, an example 

of de-globalisation not globalisation," he said. 

     He noted that the UK increasingly exports through the EU, rather 

than to it, as many goods are part of EU supply chains creating exports 

to non-EU countries. 

     One crucial factor for the UK will be whether it can maintain its 

place in these supply chains. 

     The BOE Governor restated the conclusions of the MPC's September 

meeting, that with inflation set to remain above target for three years 

and with the supply side under pressure, a rate hike was likely to be 

justified in coming months. 

     "The latest indicators are consistent with UK demand growing a 

little in excess of the diminished rate of potential supply growth and 

the continued erosion of what is now a fairly limited degree of spare 

capacity," Carney said. 

     "The continued erosion of slack lessens the trade-off that the MPC 

is required to balance and ... reduces the MPC's tolerance of above 

target inflation," he said. 

     Carney's subsequent conversation with IMF head Christine Lagarde 

focussed on climate change, workplace diversity and other non-monetary 

policy related material. 

     --London newsroom: e-mail: david.robinson@marketnews.com 

[TOPICS: M$$BE$]