Despite the UK’s resilience and flexibility, the vote to leave the EU marks a “major regime shift” with an effect on the country’s economic prospects that will take more than monetary policy to tackle, according to Mark Carney, governor of the Bank of England.
Making his second speech since the result of the EU referendum were announced, Carney suggested that the UK will have to readdress the movement of goods, services, people and capital, and that “a broad range of regulations might change”.
In an environment of increased uncertainty and tight financial conditions, Carney warned that some firms could delay investment into the UK, adding: “Through financial market and confidence channels, there are also risks of adverse spillovers to the global economy.”
He also came close to suggesting that a cut in interest rates is on the cards. The rate is already set at 0.5 percent, and other sources have suggested that it could be raised in the future as the UK battles with marginal economic growth.
He said that since the result on 24 June, “the economic outlook has deteriorated, and some monetary policy easing will likely be required over the summer”.
In the wake of ‘Brexit’, policymakers should consider three main objectives, Carney said. To assess the outlook and the risks; to develop a plan to reduce risk and find opportunities; and to “do no harm” – minimising the effect on macro-economic frameworks.
This plan should involve engaging with the EU on finding an appropriate plan for regulation for the UK financial system, Carney said.
However, he reiterated the Bank of England has taken steps towards improving the resilience of the UK’s financial system, both in the recovery from the global financial crisis, and in the run-up to the referendum.
Banks had been ”woefully undercapitalised” before the crisis of 2008, and need to continue building their resources in order to serve the real economy in “a risky and uncertain world”, Carney said. He added that the Bank of England has stress-tested banks and building societies against scenarios more severe than the UK is currently facing.
He also reiterated that UK banks have over £600 billion in high-quality liquid assets, and that the Bank of England itself is prepared to provide more than £250 billion of additional funds through its normal facilities.
Carney also pledged to continue the central bank’s additional weekly indexed long-term repo operations until the end of September, reassuring the financial market that the bank is well prepared to provide additional liquidity to combat the severe market headwinds seen even before the official result was announced.
He said: “We expect institutions to draw on this funding if and when appropriate, just as we expect them to draw on their own resources as needed in order to provide credit, support markets, and generally supply financial services to the real economy.”
Calling the UK “one of the most flexible economies in the world”, that benefits from “a deep reservoir of human capital [and] world-class infrastructure”, Carney reassured that the Bank of England will consider various methods to “promote monetary and financial stability”.
However, he closed the speech with a stark warning, saying: “In short, the Bank of England has a plan to achieve our objectives, and by doing so support growth, jobs and wages during a time of considerable uncertainty.”
“Part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do.”
He said: “The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers.”
“These will be driven by much bigger decisions; by bigger plans that are being formulated by others. However, we will relentlessly pursue monetary and financial stability. And by doing so we will facilitate the adjustments needed to realise this economy’s full potential.”
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