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What the Bank of England can do to cushion Brexit hit for UK

What the Bank of England can do to cushion Brexit hit for UK

LONDON: Bank of England Governor Mark Carney has said he expects the central bank will need to do more to help Britain’s economy after it was hit by the shock of last week’s referendum vote to leave the European Union.

Carney said on Thursday that the BoE had “a wide range of instruments” it could use to cushion the Brexit blow.

Following is a summary of measures the Bank could take.


The BoE chopped its key Bank Rate to 0.5 percent during the depths of the global financial crisis in 2009 and it has remained there since. That is a record low but it still gives the BoE more room for manoeuvre than the European Central Bank and the Bank of Japan, both of which have slashed their key lending rates to below zero.

Carney said on Thursday that cutting rates too low could hurt banks, repeating previous scepticism about negative rates.

The Bank also has to keep an eye on the inflationary impact of a plunge in sterling since the shock referendum result, something that would normally argue for higher interest rates.

The BoE’s next scheduled meeting ends on July 14 but some economists say it might wait to cut rates until Aug. 4 when it will have a better idea of how the economy is coping with Brexit.


As the world reeled from the financial crisis in March 2009, the BoE backed up its sweeping cuts to interest rates by launching a programme of bond buying, following the lead of the BOJ and the US Federal Reserve. Since then it has amassed 375 billion pounds ($499 billion) worth of British government bonds.

Quantitative easing is considered to have been most potent during the financial crisis, when markets froze up. With British government bond yields sinking to record lows this week, it is unclear how much further help new gilt purchases would provide.

BoE policymaker Martin Weale said in March the Bank could, if needed, change the focus of QE to include corporate bonds. In the 1980s, the BoE held private assets worth 5 percent of annual economic output, he said. TWEAK THE CONTROLS ON BANKS

Carney said on Thursday that the Bank’s response to the referendum shock would not necessarily mirror its actions at the onset of the financial crisis. Since then, the Bank has taken on new powers to oversee the banking sector and it could adjust some of the controls it uses to influence lending.

The BoE said in March it would raise the so-called counter-cyclical buffer (CCB) for banks, an extra level of protection in the form of higher capital requirements against future loan losses, from March of next year. Bloomberg News reported on Friday that the BoE would reverse that decision next week.

The BoE also requires banks to set aside cash to act as liquidity cushion in the event of extreme volatility in financial markets and it could relax those requirements to absorb short-term shocks.

Another option for the BoE is to revamp its Funding for Lending scheme which it launched in 2012 to incentivise lending by banks to firms and homebuyers. It was pared back to exclude mortgage lending in 2013 as the housing market picked up. It currently provides finance for small business lending.


When Carney moved from the Bank of Canada to the BoE in 2013, he brought with him his trademark policy of forward guidance under which a central bank tries to give a clear steer to markets, businesses and households on what is likely to happen to interest rates in the medium term.

The policy quickly ran into problems as a surprisingly strong recovery in the economy wrongfooted the BoE.

Subsequent steers by Carney about when rates might start to rise also proved to be wide of the mark. Carney has said the signals from the Bank helped the public to understand its broad message that rates would not rise quickly any time soon, giving them the confidence to spend.

The Bank could seek to send a new message over the summer although it would be mindful of the pitfalls of guidance.

Copyright Reuters, 2016

Courtesy : BRecorder



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