Britain's large current account deficit is less vulnerable to a sudden stop in investors funding it than its headline size suggests but still carries risks, Bank of England policymaker Kristin Forbes said on Monday.
In a speech to the OMFIF finance industry group in London, Forbes said that Britain's cross-border investments -- which have dragged on the deficit in recent years -- would offer some respite against a jump in uncertainty that could occur in the run-up to the European Union referendum on June 23.
But the relief would only be partial, she said.
"The estimated magnitude of this potential risk sharing through international exposures is moderate and would be unlikely to fully counteract the many negative effects from increased uncertainty on the broader UK economy. This is especially true over longer periods of time," Forbes said.
Forbes did not directly address the outlook for British monetary policy. But she did say that the inflation impact of any fall in sterling would be less significant if it is driven by temporary uncertainty, rather than longer-term concerns about the supply capacity of the British or global economy.
Earlier in the month the Governor of the Bank of England, Mark Carney in front of the treasury committee, said Sterling could depreciate, as much as 20 % and that exiting European Union ,was the greatest risk to UK Economy .*
Mr Carney emphasised the Bank was not taking sides in the EU referendum.
MP Jacob Rees-Mogg accused the Gov BoE of making "pro-EU" comments
The governor told the committee that an exit posed the biggest "domestic" risk in part because there could be uncertainty over such things as investment, household spending, and the impact on sterling.
Mr Carney said: "It is the biggest domestic risk to financial stability. I would say that in my judgment the global risks, including from China, are bigger than the domestic risks."
Separately, in a letter sent to Treasury Committee chairman Andrew Tyrie, Mr Carney said that Britain's membership of the EU had reinforced the "dynamism of the UK economy", and that the relationship had helped the UK to grow.
The Governor also said in his letter that Prime Minister David Cameron's EU renegotiation deal, which comes into effect only if the UK votes to remain in the EU, "delivers a number of protections and additional tools that will help safeguard the Bank's ability to continue to achieve its statutory objectives".
The letter was released as Mr Carney appeared before the committee. In a sometimes fractious exchange with MPs, Mr Carney denied claims he was "pro-EU".
Mr Rees-Mogg said his comments were "beneath the dignity of the Bank".
* full video Mark Carney in front of the treasury committee see below
Effects on Housing ,Bank of England Governor Mark Carney :
Q1082 Mark Garnier: I am very interested in your answer to the next question,
because it refers back to the 2014 stress tests that you did of banks. I think you had been
Governor of Financial Stability from 1 November, so you were Governor at that time.
Can I very briefly flick through the high-level narrative of the stress test scenario? It
talks about what precipitates this thing, which is output growth of the United Kingdom starting to disappoint relative to expectations. I am going to go through this quickly. This leads to a rapid reassessment of the prospects of the UK economy, with associated depreciation of sterling. This therefore imports inflation and we have domestically generated inflation, so we have a tightening of monetary conditions, so action from you guys. This contraction in domestic demand exacerbates vulnerabilities in the housing market. This leads
to a fall in house and other asset prices.As you get the deterioration in the UK economy, concerns over the potential scale ofbanks’ losses intensify. This increases the cost of bank funding. This has knock-onimplications for the availability of new credit to households and companies. Households
become more cautious and on it goes. You will be familiar with this doomsday scenario.
What is interesting, having looked at this, is that you can replace the opening narrative of “output growth in the United Kingdom starts to disappoint relative to expectations” with “uncertainty surrounds the United Kingdom, in terms of the outcome of the EU referendum”.Is that a fair or completely unreasonable scenario?
Jon Cunliffe: The stress test tests severe but plausible outcomes. The idea is that we find
a scenario that is in the tail of distribution, so not what we think will happen, not what islikely to happen, but something that is a severe scenario, but which could happen because, The economic and financial costs and benefits of UK's EU membership inquiry, the economic forces hang together. We tested a different scenario in 2015. If you had aloss of confidence in the UK, those effects would be possible. Those are the extremeeffects that would follow through from that. I would just say that one saw some of that inthe Three Arrow crisis of the early 1990s. There was a similar scenario there
a scenario that is in the tail of distribution, so not what we think will happen, not what islikely to happen, but something that is a severe scenario, but which could happen because, The economic and financial costs and benefits of UK's EU membership inquiry, the economic forces hang together. We tested a different scenario in 2015. If you had aloss of confidence in the UK, those effects would be possible. Those are the extremeeffects that would follow through from that. I would just say that one saw some of that inthe Three Arrow crisis of the early 1990s. There was a similar scenario there
John Mann: Anyone who cites you or the Bank of England in evidence in relation to those issues would be doing so invalidly, then.
Dr Carney: In terms of the longer-term impacts, yes. Can one take a view in terms of shorter-term potential financial stability issues and what impacts they could have in theshort term? The “short term” is an elastic term in this sense; I would define “short term”with respect to this issue as the period of uncertainty that would follow a vote to leave, if one were to happen. It is the period of uncertainty over the definition of the new relationship with the rest of Europe. One could be informed by our comments aboutfinancial stability and the potential impact on jobs, wages, house prices and other things.To be clear on your question, when one asks about the longer-term economic impact of a vote to leave, we have not prepared an analysis of that and we have no intention of preparing an analysis for that.
Q1085 Mark Garnier: Sir Jon, just to finish up on this, while the stress test looks at
everything going wrong and there being a bit of a car crash in every direction, it is not
unreasonable to say that one or two of these events could happen. Of course, it is worth
bearing in mind that the stress test is about stress testing the banking system and the financial system. It is not necessarily about looking to see if there will be a shock in the housing market, if there will be a contraction of consumer spending or if there will be a rise in unemployment or a rise in inflation. Those are just elements that go into this stress test. In your opinion, could any of those elements, either independently or together, come out as a result of increased uncertainty with a change to our economic relationship with Europe?
Jon Cunliffe: To repeat the point the Governor made, directionally, you can see such circumstances. They may not be the central probability but, directionally, you can see how those forces might play out in that way, both within the banking sector and within the economy as a whole.
Q1083 Mark Garnier: I completely take your point that these stress tests are not
designed to reflect normal activity. They are designed to reflect black swan events, if you
like. Actually, it is interesting when you read through the report that it looks at the frequency of these types of events happening. They are not actually that infrequent. If you look, there has been a larger contraction of GDP in 7% of historical outturns in the last 150 years.
Unemployment has been at a level similar to the peak level in the stress-testing scenario orhigher about six times in the past 150 years; that is 4% of outturns. Inflation has been at levels greater than those seen in the scenario about 28 times in the same period, and so these really are not black swan events. These are things that could potentially happen.
Jon Cunliffe: I would just make two points on that. One is that what you gave were the
figures for each variable, and of course the combination is different. Secondly, the house
price fall that we had, which was a peak/trough of 35%, is greater than we have seen in the
past
David Cameron calls EU referendum for June 23 2016 Official Statement @onthemarketblog
Further Reading
How low can you go ? speech by Andy Haldane BoE Chief Economist
Dr Carney: In terms of the longer-term impacts, yes. Can one take a view in terms of shorter-term potential financial stability issues and what impacts they could have in theshort term? The “short term” is an elastic term in this sense; I would define “short term”with respect to this issue as the period of uncertainty that would follow a vote to leave, if one were to happen. It is the period of uncertainty over the definition of the new relationship with the rest of Europe. One could be informed by our comments aboutfinancial stability and the potential impact on jobs, wages, house prices and other things.To be clear on your question, when one asks about the longer-term economic impact of a vote to leave, we have not prepared an analysis of that and we have no intention of preparing an analysis for that.
Q1085 Mark Garnier: Sir Jon, just to finish up on this, while the stress test looks at
everything going wrong and there being a bit of a car crash in every direction, it is not
unreasonable to say that one or two of these events could happen. Of course, it is worth
bearing in mind that the stress test is about stress testing the banking system and the financial system. It is not necessarily about looking to see if there will be a shock in the housing market, if there will be a contraction of consumer spending or if there will be a rise in unemployment or a rise in inflation. Those are just elements that go into this stress test. In your opinion, could any of those elements, either independently or together, come out as a result of increased uncertainty with a change to our economic relationship with Europe?
Jon Cunliffe: To repeat the point the Governor made, directionally, you can see such circumstances. They may not be the central probability but, directionally, you can see how those forces might play out in that way, both within the banking sector and within the economy as a whole.
designed to reflect normal activity. They are designed to reflect black swan events, if you
like. Actually, it is interesting when you read through the report that it looks at the frequency of these types of events happening. They are not actually that infrequent. If you look, there has been a larger contraction of GDP in 7% of historical outturns in the last 150 years.
Unemployment has been at a level similar to the peak level in the stress-testing scenario orhigher about six times in the past 150 years; that is 4% of outturns. Inflation has been at levels greater than those seen in the scenario about 28 times in the same period, and so these really are not black swan events. These are things that could potentially happen.
Jon Cunliffe: I would just make two points on that. One is that what you gave were the
figures for each variable, and of course the combination is different. Secondly, the house
price fall that we had, which was a peak/trough of 35%, is greater than we have seen in the
past
David Cameron calls EU referendum for June 23 2016 Official Statement @onthemarketblog
Further Reading
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