With Britain’s referendum on the European Union exactly three months away, Bank of England officials are agonizing over the dangers from a vote to leave.
On Wednesday, Mark Carney will chair the Financial Policy Committee’s first formal meeting of the year — and its last before Britain’s June 23 referendum. Just two weeks after the governor declared an exit vote as the biggest domestic risk to financial stability, officials can now ratify contingency planning for a threat that has rattled investors enough to force a plunge in the pound and a spike in sterling volatility.
Carney’s concerns — dragged out of him by lawmakers at a Parliament hearing — have since become a weapon in the highly charged political battle on EU membership, despite the governor’s attempt to remain above the fray. They suggest how the issue may dominate this week’s discussion, overshadowing topics such as bank capital, housing and a potential lack of liquidity.
“Without a doubt, Brexit is the top of everyone’s agenda until June, and possibly after if we do vote to leave,” said Alan Clarke, an economist at Scotiabank in London. “The FPC’s mandate is the financial system, so they’ll be looking at whether banks will be able to continue to do their business if there is a vote to leave. They may also talk about other risks to the financial sector, whether there would be an exodus of firms.”
The BOE’s key interest rate has been a record-low 0.5 percent for seven years and, with a hike probably still some time away, the onus is on the FPC to keep imbalances in check. The central bank is already drawing up contingency plans for a British exit from the EU and will offer extra liquidity to the financial system around the referendum.
Chancellor of the Exchequer George Osborne singled out the 10-member FPC last week in his budget speech, asking it to be “particularly vigilant in the face of current market turbulence.” The committee will publish a statement from its meeting on March 29.
“The BOE will be considering where we are in the credit and economic cycle and what we need to do to lean into it,” said Mick Grady, an economist at Aviva Investors and a former BOE official. “When rates have been so low for a very long time, the cracks start getting a bit wider.”
While the central bank has so far tried to skirt the Brexit debate, the FPC, responsible for protecting the resilience of the financial system, will need to consider the potential threats. In the past, sections of its discussions deemed to be too sensitive were redacted and released only at a later date.
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Asked about Brexit by lawmakers on March 8, Carney said it’s the “biggest domestic risk to financial stability because, in part, of the issues surrounding uncertainty” but also because it could “amplify” other risks.
After this month, the next scheduled FPC meeting will take place on June 28 — after the referendum — though some “issues meetings” may occur before that. Carney has said he’ll respect a purdah in the run-up to the vote.
The FPC may also discuss banks’ resilience this week. In December, officials said they intend gradually to increase the countercyclical capital buffer to 1 percent from zero as the economy recovers. That divided the committee, with some saying it was “too soon” for an increase.
Housing is also likely to feature, with mortgage lending surging and prices rising. After the FPC’s December meeting, Carney cited the commercial and buy-to-let real-estate markets, as well as household debt and the current-account deficit, as signs that stability risks were increasing.
Charles Goodhart, a former BOE policy maker, has said recent mortgage figures suggest there’s “a lot of potential heat in housing.”
“What the FPC needs to think about now is about countercyclical capital buffer rises and how that is going to work, particularly in the context of how it would interact with monetary policy,” said Chris Hare, an economist at Investec in London. “There are those ongoing issues in the housing market, the buy-to-let market in particular. Those seem to be the pinch points.”
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