UK: BoE's Financial Policy Committee responds to Brexit – ING

James Knightley, Senior Economist at ING, notes that as BoE Governor Mark Carney outlined in his speech last week “Uncertainty, the economy and policy”, he feels that the “economic outlook has deteriorated and some monetary policy easing will likely be required over the summer”.

Key Quotes

“It was also made clear that the Bank was considering action on financial policy in the wake of Brexit and we have indeed see that today.

The big headline is that the BoE has cut the countercyclical-capital buffer to zero from 0.5% due to a sense that the risks surrounding Brexit are “crystallising”. This situation is likely to last “until at least June 2017”. This has an effect of reducing regulatory capital buffers by £5.7bn, “raising bank’s capacity for lending to UK households and businesses by up to £150bn”. However, we also need to see something on the demand side now that confidence is softening and there are growing worries about commercial real estate, as we have seen with headlines regarding Standard Life halting redemptions on its flagship property fund.

Indeed, the BoE goes on to outline the broader Brexit risks to financial stability, citing the financing of the substantial UK current account deficit, the commercial real estate market and high levels of household indebtedness and what might happen if unemployment rises. They remain particularly worried about the buy-to-let market and also warn that global growth (and euro area activity) looks vulnerable to a “prolonged period of heightened uncertainty”.

As such, they clearly state that they are ready to respond, but emphasise that the UK’s financial system is in good health with banks having raised £130bn in capital over the past eight years. Consequently, the banks have flexibility to continue lending “even during challenging times”. The bank also suggests that financial markets have been functioning well.

While today’s actions are helpful in supporting the UK economy, it does nothing for the demand side of the equation and in that regards we expect the Bank of England to try and give the economy a bit of a boost by cutting rates by 25bp at the August MPC with QE eventually expanded up to £500bn. The general belief is that this will support asset prices and confidence, but with the UK potentially facing years of uncertainty this is unlikely to be enough to prevent a recession in early 2017.”