Carney Hints at Further Stimulus From Bank
The Governor of the Bank of England, Mark Carney, has suggested that more stimulus is on its way in order to cope with the economic fallout from the Brexit vote.
The long term effects of Brexit on the British economy are as yet unknown, but in the aftermath of the referendum itself, with sterling falling and the stock markets taking hits, Carney and the Bank have been doing their best to reassure that they have enough up their sleeve to ensure that the UK weathers the storm, however severe or mild it may be.
Last week, the Bank announced a draft of measures designed to maintain the resilience and stability of the British economy in the wake of the referendum. These included the freeing up of banks from capital buffer requirements, effectively “raising banks’ capacity to UK businesses and households by ip to £150 billion.”
These measures, and more to come, reflect what Carney described as the beginning of the ‘crystallisation’ of what the Bank’s Financial Policy Committee described prior to the referendum as “the most significant near-term domestic risks to financial stability”.
Speaking on Tuesday, Carney hinted at the possibility of further action being taken and stimulus being introduced with the most likely option, according to analysts, being a cut to the base rate either this week or in August.
Carney said: “If the outlook has worsened, to use that term, in the judgement of the MPS there always could be monetary response if that is consistent with its remit.”
Speaking to MPs, he said that he wanted to make it clear that households and businesses alike should be aware that “credit should be available for the right ideas…be it a mortgage or a new business”.
However, in order to maintain a ‘business as usual’ approach for individuals, the Bank will likely need to take action, Carney argued.
Responding to Carney’s latest statements, ING’s James Knightley said: “Carney once again signalled that the Bank has the tools to respond to economic developments.
“That tool box looks set to be re-opened tomorrow [Thursday]; we think the BoE will react to downside economic risks generated by Brexit uncertainty.”
Currently, the expectation is that the Bank’s Monetary Policy Committee will vote to cut interest rates at their next meeting on Thursday from their already record low of 0.5%, where they have sat for around seven years.
According to a recent poll from Reuters, 39 of 60 surveyed economists expected a cut to the base rate on Thursday, with 35 of those predicting a cut down to 0.25%, and the remaining four expecting it to drop to between 0% and 0.1%.
The bulk of the remaining economists expect a rate cut to come in August, when the slightly longer term effects of Brexit start to become clearer.
This split is more or less reflective of the general consensus among economist and market analysts, who see a cut to the base rate as necessary if the UK is to avoid recession.
Kallum Pickering of Berenberg Bank said: “with appropriate monetary policy support, the economy could scrape through its only a big dent over the next year or two, rather than a big recession.”
While a rate cut is very likely to come within the next month, the longer term effects of the vote to leave the EU, and as a result, the nature of the action the Bank will take, are still unclear.
Mark Carney has responded to critics who suggested that the Bank’s initial warnings about the economic fallout that would result from a vote for Brexit were deliberately misleading and that a ‘line’ had been agreed with Chancellor George Osborne in order to influence voters. Carney was accused of working on behalf of Osborne to convince the Bank’s policy makers to spread ‘scare stories’ and “phoney forecasts”.
At a meeting with the Treasury select committee, led by chairman Andrew Tyrie, where he was quizzed on the accusations, Carney vehemently denied acting with political bias in the run up to the referendum, when he warned of a possible recession if the UK voted to leave the EU.
Describing accusations of bias and dishonesty as “extraordinary”, Carney maintained: “We [the Bank] have an obligation to give these assessments.
“If we view something as the biggest risk to financial stability, we have an obligation to parliament and to the people of the UK to make that clear.”
Carney admitted to meeting in private with Osborne in the run up to the referendum, and has agreed to release notes from these meetings to MPs.
Ultimately, Carney said, the accusation were founded on a misunderstanding of how the Bank’s committee’s actually work.
He said: “I have discussions with the chancellor of the exchequer on a wide range of economic and financial matters. But the views of the FPC are the views of the FPC; they are not predetermined. They are based on robust discussions.
“I did not prejudge the lines of the FPC, and nor could I.”
While the BoE prepares its contingency tools, high street and investment banks saw modest gains in share price on Tuesday, following a period of poor performance over the last couple of weeks.
Shares in Lloyds, RBS and Barclays were all up by between 1.3% and 2.5% at the end of trading on Tuesday.
The impending arrival of new Prime Minister Theresa May appears to have given some semblance of certainty, at least in terms of political leadership, that markets seem to be latching on to.