October 28, 2016

Bank of England’s Carney sees need for summer stimulus after Brexit shock

A still image from video shows Bank of England Governor Mark Carney speaking after Britain voted to leave the European Union, in London

Bank of England Governor Mark Carney said the central bank would probably need to pump more stimulus into Britain’s economy over the summer after the shock of last week’s decision by voters to leave the European Union.

“In my view, and I am not prejudging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer,” he said in a speech on Thursday.

Carney, who has previously warned of a possible recession in Britain if it chose to leave the EU, said the BoE’s Monetary Policy Committee would announce an initial assessment of the situation on July 14, after its next scheduled meeting.

That would be followed by a full assessment when the Bank updates its forecasts for the economy on Aug. 4.

“In August, we will also discuss further the range of instruments at our disposal,” Carney said.

Investors already largely expect the Bank to cut interest rates over the summer, taking them below their already record low of 0.5 per cent to possibly as low as zero.

They also think the BoE might ramp up its bond-buying programme under which it amassed a stockpile of £375bn worth of government debt after the financial crisis.

The yield on 10-year British government bonds fell below 1 per cent for the first time earlier this week and was trading at close to that level earlier on Thursday.

Sterling fell to a 31-year low against the dollar on Monday but remains down about 10 per cent compared with before the referendum. Investors face an uncertain political outlook after Prime Minister David Cameron said he would resign after losing the vote, putting more emphasis on the BoE’s response.

In his speech, Carney cautioned that there were limits to how low the Bank could cut rates. “As we have seen elsewhere, if interest rates are too low or negative, the hit to bank profitability could perversely reduce credit availability or even increase its overall price,” he said.

Carney said contingency measures drawn up by the Bank and Britain’s financial ministry for the immediate market shocks caused by the referendum were “working well.”

He also said the Bank had “a host of other measures and policies” to steer the economy and the country’s vast banking sector through the shock triggered by the referendum result.

The Bank will hold weekly sterling liquidity auctions between now and the end of September – instead of monthly – as a precaution in case banks ran into problems getting hold of cash.

But Carney warned that central bankers on their own would not be able to eliminate the referendum shock and Britain’s economic growth prospects would be driven by “much bigger decisions; by bigger plans that are being formulated by others.”

He said it was important that Britain’s future relationship with the EU was clarified as quickly as possible, including a decision on how open it will remain to migration, one of the most sensitive issues for British voters.

Carney angered supporters of the Leave campaign before the referendum with his warnings about the consequences of a decision by Britain to drop its EU membership.

Carney and his fellow BoE policymakers will not have much hard data on how Britain’s economy has responded to the referendum shock when they meet next month.

Indicators due to be released before then include new car registrations and a measure of consumer confidence.

More meaningful surveys of the country’s manufacturing, construction and service sectors, covering the month of July, will only be published in early August.

The central bank’s Financial Policy Committee is due to release its half-yearly assessment of financial stability on Tuesday. It could temporarily relax capital rules for banks in order to keep lending flowing.

Carney responded quickly to the historic result of the referendum, delivering a televised address early on Friday as the pound and stock markets plunged.

He said the BoE would offer £250bn plus “substantial” access to foreign currency to ease any squeeze in markets and the Bank would take more steps if needed.

The central banks of the United States, the eurozone and China also pledged to provide liquidity and the Group of Seven club of rich economies has issued a statement of confidence in Britain’s economy and banking sector.

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