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 emphasized that a commitment to open trade is vital to boost weak investment in Britain and restore productivity growth. He mentioned the unlocking of capital from businesses and pension funds, planned by finance minister Rachel Reeves.

Bailey noted that Brexit, which voters supported in 2016 and took effect in early 2020, had weakened Britain's trade flows and undermined its potential productive capacity.

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

He stressed the importance of being alert to and welcoming opportunities to rebuild relations with the EU while respecting the British people’s decision. While the new Labour government has ruled out rejoining the EU's single market and customs union, Prime Minister Keir Starmer has expressed a desire to improve trade ties and diplomatic relations with the bloc.

Bailey advised looking at the broader picture for growth and understanding factors beyond Brexit.

Although Bailey did not mention the U.S. election directly, he highlighted the implications of geopolitical shocks and the fragmentation of the global economy, and the potential impact of Trump's policies on global trade and inflation.

> "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."

Earlier, fellow BoE rate-setter Catherine Mann stated that the BoE should hold interest rates until inflation risks associated with Trump's election dissipate.

Bailey supported finance minister Reeves' plans for boosting public investment announced in a budget two weeks ago. However, he agreed that the budget measures alone would not significantly raise long-run potential economic growth in Britain.

> "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 explained.

Reeves is expected to deliver her own Mansion House speech after Bailey, which will include an announcement of reforms to the pensions system to help increase funds for investment.