The Bank of England has released the minutes of its Financial Policy Committee (FPC) continuing to warn of uncertainty following Brexit.
The Bank’s FPC has reviewed developments since its meeting on 1 July and since the 23 June referendum.
The committee noted that financial system has demonstrated resilience to spikes in uncertainty and risk aversion and that core financial markets functioned effectively despite initial sharp price moves and particularly high volumes of transactions relative to normal levels in some markets. Bank funding conditions remained broadly stable.
It says this reflects the resilience of the financial sector following measures taken since the financial crisis. The FPC says it judges that the current outlook for financial stability in the United Kingdom remains challenging.
The following are some of the main points.
- Heightened uncertainty about the near-term macroeconomic outlook and the United Kingdom’s future relationship with the EU is reinforcing domestic risks. In the UK commercial real estate market, the risks of a sharp adjustment are crystallising. Prices have fallen and transactions are at their lowest level since 2009.
- Although the sharp fall in the sterling exchange rate will help to smooth the adjustment of the current account over time, the risk remains of a fall in overseas investors’ appetite to invest in the United Kingdom. Any disorderly adjustment in capital flows would be associated with tighter funding conditions for the UK real economy.
- The FPC remains concerned that the ability of some households to service their debts would be challenged by a period of weaker employment and income growth. These vulnerable households could affect broader economic activity by cutting back sharply on expenditure in order to service debts.
- The FPC judges that risks to UK financial stability from the global economy remain elevated. There remains a high degree of political and policy uncertainty in many advanced economies. European bank equity prices reflect continued concerns over banks’ profitability and, particularly in Italy and Portugal, high levels of non-performing loans.
- Capital inflows into emerging market economies have resumed in recent months, loosening credit conditions and risking a further build-up of vulnerabilities, which could leave some countries at risk of a tightening in financial conditions. Credit growth in China continues to materially outpace GDP growth, and the level and growth of credit relative to GDP in China are very high by international standards. A crystallisation of these risks is an important element of the 2016 stress test of major UK banks; the results will be published alongside the financial
- The actions of the Bank’s Monetary Policy Committee in August have supported financial stability by reducing downside risks to the near-term economic outlook. Partly driven by these actions, but also by investor perceptions of unusually low volatility, a range of fixed income asset prices appear elevated. Term and risk premia in bond markets are compressed despite heightened domestic and global uncertainty. This creates a vulnerability to a sharp adjustment that could prove disorderly – for example, if asset price falls triggered fund outflows and dealers were unable or unwilling to hold additional bonds as inventory.