Carney Warns of Brexit-Linked Slowdown as BOE Frees Bank Lending

BOE's Carney: Brexit Risks Have Started to Crystallize
  • Countercyclical-capital buffer to stay at zero until June 2017
  • BOE set to announce next monetary policy decision on July 14

Mark Carney pledged to shore up financial stability as he warned that the risks from Britain’s decision to leave the European Union have started to crystallize.

“There is the prospect of a material slowing of the economy,” the Bank of England governor said at a press briefing in London on Tuesday, after the central bank published its semi-annual Financial Stability Report. “The number of vulnerable households could increase due to a tougher economic outlook.”

Mark Carney on July 5.
Mark Carney on July 5.
Photographer: Chris Ratcliffe/Bloomberg

On a day when a survey showed a plunge in business confidence and Aviva Plc followed Standard Life Investments in suspending trading in a real-estate fund, the governor took steps to spur bank lending and signaled rate cuts or more quantitative easing could be in the offing this summer. Carney’s third appearance in 12 days since the U.K. vote highlights his role as a beacon of stability while political infighting heightens uncertainty over how the country will proceed and how severe the economic fallout will be.

The governor “is offering clear leadership and boosting business confidence at a time of political and economic uncertainty,” said Adam Marshall, acting director general of the British Chambers of Commerce. “The BOE must continue to keep a watchful eye on credit conditions, particularly for young and high-growth businesses, who tend to be the very first frozen out of the financial system when conditions deteriorate.”

‘Major Change’

The Financial Policy Committee’s measures on Tuesday included reducing capital requirements for banks, which Carney called a “major change.” The countercyclical capital buffer was cut to zero from 0.5 percent of risk-weighted assets, a move the FPC said would raise the capacity for lending to companies and households by as much as 150 billion pounds ($197 billion). 

The buffer -- designed to be bolstered in good times and eased in downturns to support lending -- had been increased, effective in March next year. Officials now see it staying at zero until at least June 2017.

Carney and the FPC gave a stark warning to banks that they should not use the extra funding they now have to increase dividend payouts.

While most British stocks have rebounded from their immediate post-Brexit slump, three of the nation’s largest lenders are down more than 25 percent. In addition, commercial-property companies slumped and Standard Life Investments suspended trading in its 2.9 billion-pound U.K. Real Estate fund on Monday as redemptions surged. Aviva cited an “extraordinary” market as it took a similar move for a property trust on Tuesday.

The pound tumbled to a 31-year low against the dollar as the prospect of Brexit weighed on investor confidence. It traded at $1.3117 at 1:11 p.m. London time -- after reaching a low of $1.3102 -- down from around $1.50 at the time of the referendum.

An index by YouGov Plc and the Centre for Economics and Business Research published on Tuesday found the proportion of U.K. businesses that are pessimistic about the economic outlook climbed to 49 percent, from 25 percent in the run-up to the referendum. Scott Corfe, the institute’s director, said expectations for sales, exports and investments have “gone off a cliff.”

The 11-member FPC said it is “monitoring closely” five key risks including the current-account deficit, which stands at almost 7 percent of economic output and which needs to funded by inward investment. The panel is also watching valuations in the commercial real-estate market, the vulnerability of indebted households and landlords, the global economic outlook and fragile liquidity in financial markets.

“As the outlook evolves, the FPC stands ready to take any further actions deemed appropriate to support financial stability,” the central bank said in its report.

The focus now shifts to the MPC, which starts meetings on Wednesday to prepare for a July 14 announcement on monetary policy. Carney said that would be a carefully judged call, taking into account any financial-stability risks from low borrowing costs.

Heightened Uncertainty

“In this environment, an environment of heightened uncertainty, it’s extremely important that any monetary action -- whatever it would be -- is well aimed,” he said. Policy makers are “thinking through the potential consequences, intended and unintended.”

James Knightley, senior economist at ING Bank NV in London, said in a note that the BOE will probably cut its key interest rate by 25 basis points to 0.25 percent at its August meeting and would boost its quantitative-easing program to 500 billion pounds from 375 billion pounds.

“While today’s actions are helpful in supporting the U.K. economy, it does nothing for the demand side of the equation,” he said. Still, “with the U.K. potentially facing years of uncertainty, this is unlikely to be enough to prevent a recession in early 2017.”

Be Prudent

In the meantime, the battle for the U.K.’s political leadership edges on. All 330 Conservative members of Parliament will be balloted on the five contenders vying to succeed Prime Minister David Cameron, with the one receiving the fewest votes dropping out of the race when the results are announced at about 7 p.m. in London.

Ultimately, Carney’s advice to Britons was to be “prudent” with their finances -- a message he said he would always deliver.

“You want to make sure that as a family, as an individual, that you’ll be able to service that mortgage when times are tough; you don’t want to lose your home,” he said. “We’d tell you that if we were in the 10th year of a boom.”

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