Brexit risks to UK are ‘crystallising’, says Mark Carney

Governor of the Bank of England Mark Carney. Picture: Getty Images
Governor of the Bank of England Mark Carney. Picture: Getty Images
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Bank of England governor Mark Carney unveiled a move to boost lending by up to £150 billion under plans to contain the fallout of the Brexit vote as the pound plunged to fresh 31-year lows.

Mr Carney sought to assure the Bank’s efforts to soften the impact of the EU referendum result were working, but he raised concerns over the vulnerability of debt-laden households to an economic slowdown.

While he stopped short of repeating recession warnings, he said the UK faced the prospect of a “material” slowdown in the economy and that risks the Bank had feared ahead of the referendum had begun to emerge.

Carney was speaking at the launch of the Bank of England’s six monthly Financial Stability Report, which states: “There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.”

The governor’s comments came as the pound dropped below 1.31 US dollars for the first time since 1985 and sunk to its weakest level against the euro since 2013 at 1.17 euros.

Sterling’s latest slide followed worse-than-expected figures for Britain’s dominant services sector last month.

The pound was also hit after insurance giant Aviva suspended trading in its £1.8 billion property fund as investors scramble to pull their money out of UK commercial property holdings.

Its decision follows a day after Standard Life Investments halted dealing in its £2.7 billion UK Real Estate fund.

In his third statement since the Brexit vote, Mr Carney sought to assure that action taken by the Bank was helping shore up the economy and financial system.

He said: “The Bank has a clear plan. We are rapidly putting its main elements in place. And it is working.”

The Bank will reduce the capital required to be held on banks’ balance sheets by £5.7 billion, which it said would help bolster their lending firepower by up to £150 billion.

Chancellor George Osborne hailed it as an “important move” as he met with major lenders to discuss the response to the referendum result.

Mr Carney added: “Today’s action means that UK households and business who want to seize viable opportunities in a post-referendum world can be confident they will be supported by the financial system.”

In its twice-yearly Financial Stability Report, the Bank confirmed risks to the economy, such as the UK’s gaping current account deficit, which stands close to all-time record highs, at 6.9% of gross domestic product.

The Bank said it also remains concerned about the buy-to-let market.

But it said despite bank share falls of up to 20% since the referendum, the UK’s financial system is in good health, having raised more than £130 billion in “rainy-day” capital since the financial crisis.

Mr Carney said last week policymakers were likely to slash interest rates over the summer.

Some economists are forecasting a cut from 0.5% to 0.25% as soon as next week when the Bank’s Monetary Policy Committee meets, while rates are expected to fall to zero by the end of the year.

Mr Carney also signalled the possibility of the Bank reviving its quantitative easing (QE) programme, having already pledged to pump in at least £250 billion if needed to calm markets in the immediate aftermath of the Brexit decision.

The Chancellor said on Monday that the Treasury stood ready to expand the Funding for Lending scheme, which offers banks cheap access to finance on the basis that they lend more.

James Knightley, economist at ING, said measures taken by the Bank 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.”