BOE acts to ensure lending flows
Print Edition
THE Bank of England yesterday took steps to ensure British banks keep lending and insurers do not dump corporate bonds as it said the economic risks it warned of before the vote to leave the European Union had started to materialize.
The pound fell to a fresh 31-year low against the US dollar, hit by the suspension of trading in British real estate funds run by major investment firms, and there were other new signs of weakness in the economy.
The BOE, which is trying to offset the hit to the economy from the June 23 referendum result, said it would lower the amount of capital banks are required to hold in reserve, freeing up an extra 150 billion pounds (US$196 billion) for lending.
Governor Mark Carney said the BOE had warned in March that risks around the referendum posed the most significant near-term domestic risks to financial stability.
“Some of those risks have begun to crystallize,” he said.
Finance minister George Osborne met the heads of top banks and said afterward they had told him they were in good shape to cope with the turmoil caused by the vote’s shock result.
“They report back that capital is strong, liquidity is strong, and we’ve got to make sure that lending is available to businesses ... and they’ve assured me that it will be,” he said.
The BOE move reversed a decision it took earlier this year, when it started tightening screws on lenders because Britain’s economy had appeared set for more growth.
“It means that three quarters of UK banks, accounting for 90 percent of the stock of UK lending, will immediately have greater flexibility to supply credit to UK households and firms,” Carney said.
Amid uncertainty about Osborne’s future as finance minister following the announcement by Prime Minister David Cameron that he will resign, more responsibility has fallen on Carney and the BOE to steer Britain through its political crisis.
The pound resumed its fall, sinking over 1.4 percent to below US$1.31 for the first time since September 1985. It fell 1.2 percent against the euro. Yields on 20 and 30-year UK government bonds hit new lows.
The slide in the value of the pound came after the fund arm of insurer Aviva said it had suspended its 1.8-billion-pound UK Property Trust, following a similar move on Monday by insurer Standard Life.
The BOE said foreign flows of capital into commercial real estate tumbled 50 percent in the first three months of 2016 and transactions fell further in the second quarter, an extreme example of concern among investors about the referendum.
There were other signs of economic weakness yesterday, and the BOE said: “The current outlook for UK financial stability is challenging.”
Business confidence fell sharply in the days after the vote to leave the EU, a survey showed, and retailer John Lewis said its sales grew more slowly last week.
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